One Way to Guard Against Outliving Your Money in Retirement

older man with binoculars

Seniors face a cornucopia of uncertainties entering retirement: will investments do well? Will inflation eat into my benefits? Will I outlive my savings?

Over at the Brookings Institute, a column has been published advocating longevity annuities as an answer to the uncertainty that accompanies retirement.

Authors Katharine G. Abraham and Benjamin H. Harris explain:

Longevity annuities might be an answer. They’re an insurance product uniquely designed to protect against the risk of outliving your money. Like a standard annuity, a longevity annuity pays a fixed amount for as long as the policy holder is alive. But unlike a standard annuity, a longevity annuity only begins to pay benefits after a fixed period—typically 10, 15, or even 20 years.

This deferral means that many annuitants will never receive a dollar in benefits, and that’s exactly the point. Like any other form of insurance, longevity annuities only pay out if the outcome being insured against is realized. Policy holders who live well past their life expectancy can rely on payments from a longevity annuity to shore up their retirement finances. Those who pass away before the deferral period ends won’t need to rely on those payments for financial security.

The long deferral period also means that longevity annuities are remarkably inexpensive relative to immediate annuities. At current prices, while a $100,000 premium will buy a 60-year-old male an immediate monthly payment of around $535, the same $100,000 premium will buy him a monthly payment of around $2,540 if purchased with a 20-year deferral. Practically speaking, this means that newly retired individuals need to spend much less to guarantee a given stream of income in late old age.

Academic work on longevity annuities has estimated that the optimal amount to spend on longevity insurance is about one-eighth of a retiree’s financial assets. Spending that amount leaves a majority of wealth available to ensure against other risks and to invest in other priorities, such as long-term care needs or leaving an inheritance to children, while still being protected against outliving one’s assets. During the waiting period before benefits begin, retirees can draw down remaining financial wealth, tap into housing equity, or continue to receive income from work to supplement Social Security and Medicare benefits.

Read the entire column, featuring more analysis of longevity annuities, here.


Photo Credit: Marjan Lazarevski via Flickr Creative Commons License

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