The female members of my wife's family have all lived into their 90s, at least. That means we'd better have a doozy of a retirement account.
With Methuselah wannabes in mind, the
Uncle Sam's new niceness doesn't mean that a longevity annuity is a good idea for everybody. As with any deferred annuity, low interest rates and fees can be a turnoff.
But the tax change will have financial salesmen beating the drums for them, so let's take a look.
Longevity annuities provide a monthly income for life starting once you're really old, often age 75, 80 or higher. The idea is to make sure you don't outlive your savings.
So they're best for people who expect to live a very long time.
Spendthrifts and investor hotshots should also take note. If you think you might blow through the rest of your retirement savings before you die, a longevity annuity might keep you in Geritol. Ditto if you think you can outsmart
Until now, you practically couldn't buy an annuity using your IRA or 401(k) account if payments were to begin after age 70. The change lets you buy a policy that starts paying as late as age 85. We'll explain tax details later.
Most annuities come with baggage. For one, they tend to be oversold. They pay high commissions to salesmen, and as a result, they're often pushed on people who'd be better off with other investments.
Once you put the money in a longevity annuity, it is usually impossible to get it out again. Also troublesome: Today's low interest rates keep the ultimate payouts on the low side. You might well get a better return using the target date fund in your 401(k).
That said, this form of annuity provides some real security -- a monthly payment that you can't outlive unless your insurance company dies before you do. Even then you'll probably do OK.
That's why people at retirement sometimes put a part of their savings in an immediate annuity, which begins paying out right away. But longevity annuities, also called deferred income annuities, provide fatter checks. You're rewarded for letting the insurance company use your money before the payouts start.
Say you're a 65-year-old man and you hand the insurance company
Assume that inflation will rise at about 2 percent a year, and that money equals the buying power of
That illustration assumes a straight, no-frills annuity. Your heirs also get nothing when you're dead.
Suppose you choose an option that lets your heirs get your investment back if you die before you collect, and the part you haven't spent if you die afterward. That reduces your monthly take to about
That annuity payout, plus
You can see more illustrations at the longevity annuity chart at ImmediateAnnuities.com.
There are other variations -- ones that adjust the payout with inflation, or promise a payment for a minimum number of years whether you last that long or not. All those options lower your monthly payout, compared with a no-frills deal.
Payouts for women are a little less than those for men, because men generally die sooner.
Payouts are set in part by today's interest rates, and those rates are very low. The general betting is that rates will be higher in future years, so it may pay to wait.
Or maybe not. Death figures more than rates in setting payouts, notes
Salesmen like to use the word "guaranteed" when talking about the payouts. Baloney.
The guarantee comes from the insurance company, and companies sometimes fail. Buy an annuity and you're betting that the company will live as long as you. When insurers die, state guarantee funds step in to protect customers, but their coverage is limited.
Now for the tax changes.
People approaching retirement often have most of their money in their traditional 401(k) and IRA retirement accounts. Once they turn 70 1/2 , they have to start taking annual withdrawals and paying taxes on the money. (Roth accounts have different rules.) The withdrawal amount is calculated by life expectancy and account size.
That was a problem for people who want to buy a longevity annuity with their retirement account. Their withdrawal was calculated including the amount they paid for the annuity. In theory, they could draw their 401(k)s dry before the annuity payments kicked in at age 80 or 85.
The new rule limits the annuity payment in the withdrawal calculation -- as long as the amount paid is at most a quarter of the retirement account, or
So, longevity coverage is now more attractive for many retirees.
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