Worried You’ll Outlive Your Money? There’s Insurance for That

Photo (cc) by aka Jens Rost

Worrying that you could outlive your money? If so, you’re not alone.

In the past it was common for employers to provide a pension plan, known as a defined benefit plan. These plans, like Social Security, provide a monthly check you can’t outlive. Today, however, more companies shift the retirement burden to employees by providing a 401(k) or other savings-type plan. These plans, known as defined contribution plans, allow the employee to save money in a tax-advantaged investment account they can draw on in retirement.

The problem? No matter how much you build up in a 401(k), you won’t have a predictable, or necessarily comfortable, income for life. That’s not a relaxing feeling for those entering into what are supposed to be relaxing years.

The insurance industry long ago recognized this problem and created a solution. It’s known as a longevity annuity — an investment you fund now that guarantees you a future income stream for life.

Sow now, reap later

Here’s how it works: With a longevity annuity, also known as a single premium deferred annuity, you pay a lump sum, then wait a period of time before collecting your stream of income for life.

The younger you are when you buy the policy, and the older you are when you collect, the lower the price. “Not everyone will live beyond 80 or 85, so those who do so can collect more income than they would have been able to produce on their own,” Reuters says.

Longevity annuities aren’t new. But they’re a hot topic now because the government recently changed the tax rules, making them more attractive and more accessible to retirement savers.

USA Today explains:

The Treasury Department and the Internal Revenue Service (IRS) just gave IRA owners and 401(k) plan participants the green light to invest in longevity annuities inside their retirement accounts, without having to worry about laws that require minimum distributions (RMDs) from those accounts after age 70½.

Why buy a longevity annuity?

The obvious answer is to have an income stream for life. The newly approved products — called “qualifying longevity annuity contracts” or QLACs — are:

  • Exempt from required minimum distributions. When you invest in 401(k) plans and IRAs, the IRS requires that, after you are 70½, you have to withdraw at least a minimum amount each year. QLAC longevity insurance is exempt; you can keep your money in the account until your scheduled payouts begin.
  • Priced identically for women and men. Women generally live longer than men, and so they’d typically be required to make a larger initial investment to get the same monthly lifetime benefit from an annuity — up to 25 percent more, according to USA Today. But employer plans use unisex mortality tables, so women and men will pay the same price.
  • Sometimes offered with death benefits. Longevity annuities may offer an optional return-of-premium death benefit. That means if you die before receiving at least as much as you’ve put in, premiums paid but not received can be returned to your account. Choosing a death benefit, however, can reduce your monthly payments.
  • Sometimes offered with inflation protection. Products vary, depending on your company and the insurer, but inflation adjustments are a feature of some — for a fee, of course. Joseph Tomlinson, managing member of Tomlinson Financial Planning LLC in Greenville, Maine, told USA Today, “The ideal would be a product that paid out in real dollars, adjusting for inflation during both the deferral period and the payout period.”

To learn all of the details, read the new Treasury Department regulations.

Costs and the payouts

Costs will vary, depending on your age and when your payout starts, and on whether you purchase features like a death benefit or inflation protection. They will also vary wildly depending on which company you choose.

According to Consumer Reports, a 65-year-old man making a $100,000 contribution can expect to receive from $36,000 to $62,000 annually upon reaching age 85, depending on the company issuing the contract. That’s a big spread and underlines the need to shop carefully.

Should you buy?

The new rules let you use up to 25 percent of your IRA or 401(k) account balance or $125,000 (whichever is less) to buy a qualified longevity annuity.

The idea is not to invest all your savings in these products. There’s safety — and perhaps better returns — in diversifying your investments. You’ll need a portion of your retirement savings accessible in case you need to make big withdrawals.

Another factor to consider: Annuity payouts are tied to interest rates. You might regret locking your money up now, when rates are at historic lows, if rates rise a few years down the road. Investing when rates are higher means a higher income when you start taking payments.

You’ll need to look at your overall financial situation to know if one of these annuities is a good fit. A smart way to do that is to hire a fee-only certified financial planner for a few hours to make sure you’re covering all your needs and seeing all the options.

Competition is coming

One attraction of these annuities is that the assurance of a guaranteed income stream later allows you to safely withdraw more from savings during your early retirement years.

One downside is that, unless you pay extra for inflation protection, the value of your payout will be diminished over time.

But there’s probably time to wait and see what the market does in response to the changes. “Expect heightened competition to improve the policies,” Reuters predicts.

Not for long-term care

If you are at retirement age now and are hoping to cover the costs of long-term care, an annuity probably is not the right tool. With the high cost of assisted-living facilities and full-time nursing care at home — the median cost of assisted living is more than $3,500 a month — you’d need to make a large investment to get a payout large enough to cover your needs. And your principal will be tied up in the annuity.

Will you have enough savings to retire? Post your thoughts in the comments are below or at Money Talks News’ Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
8 Things I Always Buy at Costco
8 Things I Always Buy at Costco

From bacon to birthday cakes, here are my favorite deals at the popular warehouse store.

5 Ways to Put an End to Junk Mail
5 Ways to Put an End to Junk Mail

Here’s how to keep unwanted mail from clogging your mailbox and trash can.

Stop Buying These 19 Things Online
Stop Buying These 19 Things Online

The internet has changed how we shop. But for some things, you’re still better off buying the old-fashioned way.

5 Ways Anyone Can Save on Out-of-Pocket Health Care Costs
5 Ways Anyone Can Save on Out-of-Pocket Health Care Costs

Here’s how to lower your health care costs without skimping on care.

5 Cheap and Easy Ways to Make Your Car Smell Delightful
5 Cheap and Easy Ways to Make Your Car Smell Delightful

These tips will leave your ride smelling delightful for next to nothing. Some options are also chemical-free.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

Am I Eligible for My Mother’s Social Security Benefit?
Am I Eligible for My Mother’s Social Security Benefit?

Can an adult daughter tap into her late mother’s benefit?

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

11 Generic Products You Should Buy at Costco
11 Generic Products You Should Buy at Costco

Not all generics are worthwhile, but these are among the best from Costco’s Kirkland Signature brand.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have all of these documents that are crucial to their golden years — especially during a pandemic.

8 Tips for Retiring Comfortably on Social Security Alone
8 Tips for Retiring Comfortably on Social Security Alone

It’s never too early to start learning how to live well while living on less.

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

9 Small Expenses That Are Bleeding Your Budget Dry
9 Small Expenses That Are Bleeding Your Budget Dry

Keep more of future paychecks by eliminating these budget-busting unnecessary expenses.

The 4 Best Things to Buy in January — and 4 to Avoid
The 4 Best Things to Buy in January — and 4 to Avoid

As a new year dawns, deals abound for some types of products. In other cases, it pays to wait.

11 Huge Retirement Costs That Are Often Overlooked
11 Huge Retirement Costs That Are Often Overlooked

Does your retirement budget account for all of these costs?

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.