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Longevity annuity alleviates worries about outliving your money

Longevity annuity alleviates worries about outliving your money

You might be confident that your nest egg will fund your lifestyle until 85. But what if you live to 95? Longevity annuities, or longevity insurance, are a newish breed of annuity offering the pension-less a stream of payments in old age that can alleviate worries about outliving your money or downgrading your quality of life.

You first deposit a lump sum with an insurer. Then at an age that you specify, typically 80 or older, you collect a fixed monthly or annual payment until you die. That can allow you to spend money freely in retirement and travel, knowing that you’ll have an assured cash flow if you reach an advanced age, says Wade Pfau, professor of retirement income at the American College in Bryn Mawr, Pennsylvania. Pfau has done research showing that putting 10 percent of one’s portfolio into a longevity annuity can provide that consistent cash flow.

Longevity annuities, however, are not all created equal and are only offered by a handful of insurers. Here are some wildly different quotes we received when we asked for the annual payout of a hypothetical 65-year-old man depositing $100,000, who intends to begin collecting at 85:

Company
Annuity name
Annual payout
New York Life
Guaranteed Future Income Annuity
$62,950
Symetra
Freedom Income Annuity
$58,832
MassMutual
RetireEase Choice
$49,245
MetLife
Longevity Income Guarantee (Maximum Income Version)
$36,305

If you were to buy the New York Life annuity and live until age 95, you would collect $629,500, on an investment of $100,000. That sounds like a great return. But, here are the downsides:

Dying prematurely.
If you get hit by a bus after signing the contract your survivors get nothing. To leave something to them in the event of your extra-early passing, you’d need to add a survivor benefit. That will, however, reduce the payout. With New York Life it will drop from $62,950 to $40,770 annually with a “cash refund” option. That option allows your beneficiaries to receive the full $100,000 back if you die before collecting anything. If you die during the payment period, after getting $20,000 in income, for instance, your beneficiaries get $80,000.

Your insurer goes belly up.
Since there could be a couple of decades between when you deposit cash and are due to start collecting, there is the risk an insurer might not still be around to pay you. Most states insure annuities up to a certain limit, generally $100,000 or more. But you should check the financial strength of any insurer with a ratings agency, such as Weiss, S&P, AM Best, or Moody’s.

Inflation takes a bite.
From the time you deposit money to when you collect, inflation will eat away at your payout. Assuming a 3 percent annual inflation rate over those 20 years, that $62,950 NY Life offered to our hypothetical 65-year-old is really worth just $34,854. Of course, you don’t buy annuities because they’re a good investment. You buy them because they give you a guaranteed income for life.

For more information, learn about planning for your retirement years.

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