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Sunday, December 10, 2023

Can This Product End the Fear of Running Out of Money in Retirement?

Top of the list of retirement fears for most seniors is the worry about running out of money. Can a longevity annuity take those demons away? 

The greatest fear in retirement isn’t death, or even loss of mobility or cognition. It’s the fear of outliving your savings. Longer life expectancy is only compounding that worry. What if you found out there was a way to ensure you have adequate income throughout your last years?

Guaranteed Income via Longevity Annuities

Longevity annuities don’t start paying out until you reach a specified age, such as 70 or 80. 
They will "kick in if you're still alive at a given age to ensure that no matter what's happened in your portfolio, you have some amount of money to live," says David Blanchett, Ph.D., who heads retirement research at PGIM DC Solutions, the global investment management business of Prudential Financial Inc. 

Even people who are hugely overfunded for retirement may have a hard time spending down assets. A longevity annuity can create enough certainty around future income that they are able to enjoy the fruits of their labors without worry. 

"What annuities do, behaviorally," says Michael Finke, Ph.D., professor of wealth management at The American College of Financial Services, "is give the client a pathway to spending down the money that they've saved without the fear that they're going to run out."

How Longevity Annuities Function

The way it works is that you use a lump sum to purchase a guaranteed “retirement paycheck” designed to cover essential expenses at least 13 months and up to 40 years in the future. Older adults can buy one or several annuity contracts that earn interest while the funds are maturing. A couple can purchase a contract to cover them both, paying out as long as one of them is living. 

QLAC Pros and Cons

There are many benefits to purchasing a QLAC:
  • Guaranteed retirement income
  • Simple, understandable structure
  • Tax deferral benefits
  • Delayed required minimum distributions
  • Low risk
  • Can add second annuitant and/or death benefits

Following are some of the downsides:
  • Illiquidity
  • You get nothing if you die before payouts begin
  • No market exposure
  • Investment limits of $200,000
  • No inflation protection

The insurance company keeps the money, which earns a specified amount of interest for the purchaser of the annuity contract. When you are buying an annuity, the rating of the company you buy it from should be top of mind. You should be willing to get slightly smaller payouts from a company with a sterling reputation. 

After all, you may be waiting decades for the payout and you don’t want the company to go bankrupt in the meantime. Go here to find the top companies who rate insurers and their rating systems.

Longevity annuities, also known as deferred income annuities or delayed income annuities, are a sound product for healthy seniors who can expect to live long enough to benefit from them when they begin, which is often at age 80 or 85. They are usually purchased by well-off older adults searching for a way to get assurance that they won’t be broke in their later years. 

However, they represent only a tiny fraction of the overall annuity market. Why? Many people have a hard time with the idea that they can’t touch their money until many years down the road. And some financial planners don’t have the software to compute the total impact on a client’s portfolio.

Qualified Longevity Annuity Contracts (QLACs)

But if they are purchased with qualified assets, such as funds in an IRA, there are tax benefits to be reaped as well. The Secure 2.0 Act allows savers to use funds from qualified (pre-tax) retirement accounts to purchase up to $200,000 worth of qualified longevity annuity contracts (QLACs). You can even include a “return of premium” feature so a beneficiary gets the purchase amount, less any payouts, upon your death. However, this rider will reduce the guaranteed amount of your payout.

The purchase price of a QLAC is removed from the required minimum distribution (RMD) until the purchaser turns 85, when income may be lower and taxes less. Combined with Social Security income, a longevity annuity can be just the product to provide peace of mind through a long retirement. 


This article is not intended to be a substitute for professional financial advice from a qualified financial advisor.


Blog posting provided by Society of Certified Senior Advisors