Is a Longevity Annuity a Good Guaranteed Retirement Savings Strategy for You?
Think you might want to tap into a guaranteed income strategy through longevity annuities? Let's go over why people choose them if they're worried abo...
It's hard to know exactly which type of retirement vehicle makes sense for your needs. (I used to work in higher education, and believe me, they pushed annuities hard.)
However, if you worry about running out of money in retirement, you may want to consider a longevity annuity. Let's explore whether you should tap into this option.
What is a Longevity Annuity and How Does it Work?
When you buy a longevity annuity, you put forth a lump-sum premium in exchange for a future monthly paycheck. This monthly paycheck continues for as long as you live. Put simply, a longevity annuity turns your assets into guaranteed income for life — it offers you the option of not outliving what you've saved for retirement.
Your insurance company may also give you money for a certain period of time instead of your whole life — you'll need to learn the fine print by peeking into all the details with your insurance company. The size of your payout depends on your premium amount, age and gender.
A longevity annuity will pay out years after you pay the premium. During what's known as the deferral period, the insurance company invests your money.
Take a look at the different types of longevity annuities below:
- Single premium immediate annuity: Unlike a deferred annuity, an immediate annuity doesn't take forever to pay out. You receive money immediately or within a year after you put forth your lump-sum payment.
- Deferred income annuity: You can tap into lifetime income as early as 13 months from the policy issue date to up to 40 years away, depending on your insurance carrier.
- Qualified longevity annuity contract: This type of annuity is a deferred plan, but you can only use it through a Traditional IRA, 401(k) or other approved account type. The IRS will allow you to defer to age 85, though many people choose to tap into the longevity annuity earlier.
Pros and Cons of Longevity Annuities
Take a look at the pros and cons of longevity annuities.
It's nerve-wracking to land on the right kind of retirement savings because, let's face it, that's what you have to live off of for the rest of your life! Let's start with the reasons you may want to get a longevity annuity. A longevity annuity:
- Provides peace of mind: Guaranteed lifetime income can provide you with peace of mind through a paycheck that you won’t outlive. The longer you live, the more you'll get out of the benefit.
- Offers optimal tax benefits: The IRS designates longevity annuities to get the same tax treatment as IRAs. In other words, you don't have to pay taxes when you take money out of your account as long as it's a qualified longevity annuity. However, you purchase nonqualified annuities with post-tax funds and might have to pay income taxes each year. Make sure you know what type of annuity you're looking into.
- Simplifies your retirement planning: With a longevity annuity, you'll automatically get a paycheck during retirement. It can ultimately simplify knowing what to invest, what to invest in and takes the DIY out of retirement planning.
- Your spouse can get in on the benefit. You can set up a joint annuity, which means that your spouse can tap into the benefits even if you pass away. This offers incredible stability for your spouse.
- Protected by downturns in the stock market: Regardless of how the market performs, you can still tap into your longevity annuity income upon retirement.
- No required mandatory distributions (RMDs): You don't have to take RMDs, or required payments, if the cost of your longevity annuity is no more than $125,000 or 25% of your combined qualified retirement savings.
Naturally, you'll face some cons that affect choosing longevity annuities. Let's take a look at the cons:
- More illiquid than stocks and bonds: You can accelerate some monthly payments, but in general, you're "stuck" with the same monthly amount.
- No cash value: You don't have a cash value that you can withdraw for with a longevity annuity.
- Your money becomes isolated from the market. In other words, even if the stock market performs well, you can't take advantage of the upswings in the market.
Should You Get a Longevity Annuity?
So, should you tap into longevity annuities? You have to answer that question for yourself.
You may want to get one if you:
- Will need ongoing money in retirement
- Know you want to receive payments later on in life (to tap into larger monthly payments)
- Want to hedge longevity risk
- Want to get protection for a spouse
- Prefer to protect yourself from inflation
However, you only have to look as far as the cons to determine whether a longevity annuity will work for you. Just knowing that you have the potential to lose funds (income doesn't go to your heirs like it would with a retirement fund) and you can't invest like you may want to. You also can't access money tied up in an annuity. You'll also really have to make sure that you trust your insurance company — only choose reputable companies!
Tap into a Longevity Annuity Only After You Weigh the Pros and Cons
Once you weigh the pros and cons against your specific situation and your current assets, you can make a decision about whether you need a longevity annuity.
You may also need to heavily consider that you run the risk of never tapping into the longevity annuity at all. In other words, if you die before the payouts start, you may not receive any money at all. For example, let's say you die at 78 and the payouts had meant to start at age 80. You won't get any money at all.
Also, longevity annuities are complicated. You need to consider a million things before you get them: whether you need a joint-life version, a cash refund version or even a joint-life version with a cash refund. It's a good idea to thoroughly read everything you can about the longevity annuity you're considering. Call the insurance company if you have questions and make sure you understand which type of product works best for you.
Before you make a final decision, make sure you have a savings account built up specifically for emergencies. You may even want to have a conversation with your doctor about your life expectancy. If you have health issues, a longevity annuity may not be right for you.
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