Longevity Annuities

Earlier 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?

James
 

James retired in 2005 after serving 21 years in the United States Army. During the latter part of his career, James' interest in personal finance was piqued based on his own experiences and observations of the way most Americans plan – or more accurately, fail to plan – for retirement and the difficulty many face in starting the process. His most valued education has been lessons learned from personal experience and through conversations with smart, savvy friends.

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