Longevity Annuities

Withdrawal PlanEarlier today, the U.S. Treasury announced new rules which will permit employees to purchase longevity annuities – with guaranteed lifetime payouts – in their 401(k) and IRA plans.

Apparently the US treasury and Department of Labor have been working on this new option since 2010 when they issued a request for information on how 401(k)s could provide better lifetime income.

The objective of the longevity annuities is to protect retirees from exhausting their savings in their later years. A noble objective. As noted in the latest Merrill Edge Report, 55% of Americans fear going broke in retirement.

As discussed previously here, a coherent withdrawal plan is a critical piece of an overall retirement plan. Accumulating a large nest-egg is only one part of the equation.

The new rules permit participants to use up to 25% of their account balance or $125,000 – whichever is less – to buy a longevity annuity without concerns about non-compliance with the Required Minimum Distribution rules.

Also of note, the dollar limit will be adjusted for inflation in $10,000 increments.

My understanding is that the longevity insurance is actually a deferred-income annuity, touched on here in a broader conversation about annuities, in which a person pays a lump sum premium to an insurer in exchange for a guaranteed lifetime income stream that begins many years later.

One obstacle that must be overcome for those that might be interested in this product is access to the annuities. According to the Treasury Department, only about 20% of 401(k) plans currently offer annuities.

While I don’t see a place in my retirement portfolio for this particular product, it might work well for someone who has no, or a limited number of, guaranteed (i.e. pension) income streams.

Are you concerned about running out of money at some point during retirement? What are your initial thoughts about longevity annuities?

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.


  1. No, I’m not concerned about running out of money but ask me in a few years. 😉

    I don’t think annuities will play a part in our retirement plans, but never say never I guess. I will look into more as we approach that time to make sure there are no advantages we were not aware of.

    Have a good 4th of July, James!

    • I own a variable annuity, though I am not a huge fan. I bought the annuity years ago when my only option for a retirement plan was an IRA. Once I was in a position to maximize the contributions to the IRA, I was looking for another vehicle to invest some money. A lot has changed since that time. I started a job that offers the Thrift Savings Plan (equivalent to a 401k) and a defined benefit plan; and I got married.

      Between my military pension, the future pension from my current job, my wife’s future pension from her current job and Social Security benefits for us both, we are good to go with respect to guaranteed income streams. Moreover, between my IRA, my wife’s IRA and TSP plans for both of us, we have more than enough retirement plans to contribute to. I occasionally I throw a few dollars at the annuity, but it definitely is not a critical piece of our retirement portfolio.

      Though I don’t completely rule them out, when you combine the typical high fees and penalties for early withdrawals associated with annuities, I generally do not believe they are the best option for most people.

  2. I certainly can see where this would be helpful for some people. It is hard to figure out how much is needed and how it should be divided out. The government could be moving in the right direction with this. Great post, thanks!

    • While I am not a fan of annuities, more options are certainly better. Whether or not it is appropriate for some will depend on there long-term, comprehensive plan.

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