Longevity annuities can be a good deal for seniors. But not many

On Oct 23, 2021

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American life expectancy is trending up — and that creates more financial risk for retirees, who must make their nest eggs last a longer time.

An average 65-year-old today will live another 20 years, about six years more than in 1950, according to the Centers for Disease Control and Prevention.

Seniors can take measures to reduce this “longevity risk,” such as working longer and delaying Social Security.

They also have a type of annuity at their disposal — a longevity annuity — that is among the best financial deals for seniors who worry their money won’t last, according to retirement experts. However, they’ve been little used to date.

“It’s contingent on living a long time,” said Wade Pfau, a professor of retirement income at The American College of Financial Services. “If you live a long time, you’ll get the most bang for your buck that way.”

How they work

A longevity annuity is like a form of old-age insurance. There are many different types, but such annuities are a form of “deferred income annuity.”

Here’s the basic premise: A retiree hands over a chunk of money to an insurance company today and begins getting monthly payments many years later, generally starting between age 75 and 85.

As with other annuities, that stream of income is guaranteed to last for the rest of your life.

But the deferred payments offer a unique benefit: Insurers pay more on a monthly basis than with other annuities that start earlier in life. (Morbidly, this is because there’s a greater chance that buyers will die before their income starts — thereby spreading the pot of money over fewer remaining people.)

The idea is to create a more finite horizon to plan for.

David Blanchett

head of retirement research at PGIM

Here’s a rough example, using a quote for a 65-year-old man in New York who buys a no-frills annuity with a $100,000 lump sum. This person would get about $500 a month ($6,000 a year) for life if he started receiving an immediate payout; the same buyer would get about $2,800 a month ($33,600 a year) by waiting 20 years to start payments.

That level of income can help defray concerns of outliving one’s investments and other savings, according to retirement experts.

“You don’t know how long you’re going to live,” said David Blanchett, head of retirement research at PGIM, Prudential’s investment management arm. “The idea is to create a more finite horizon to plan for.

“You know when you survive to that age, you’ll be taken care of.”

A certain type — a qualified longevity annuity contract, or QLAC — can also reduce a retiree’s required minimum distributions from individual retirement accounts and 401(k) plans.

Consumers can use up to $135,000 or 25% (whichever is less) of their retirement…