Longevity Annuities

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

If the thought of outliving your retirement savings gives you cold sweats, you’re not alone. For many, the uncertainty of post-retirement finances is a significant concern. But what if there was a way to guarantee a steady income stream, regardless of how long you live? Enter longevity annuities. A financial tool gaining traction among those planning for retirement, longevity annuities offer an effective solution to the fear of outliving one’s savings.

Understanding Longevity Annuities

A longevity annuity is a deferred income annuity that begins payments later, usually once the annuitant reaches a specified age. But how does it work, and what makes it a desirable option for retirement planning?

Predictable Income Stream

Unlike other financial investments subject to market risks, longevity annuities provide a predictable income stream. You pay a lump sum or series of payments to an insurance company, and in return, you receive guaranteed payments in the future, often for the rest of your life. This type of annuity essentially acts as a personal pension plan.

Example: Consider the case of Laura, a 65-year-old retiree. She uses $100,000 from her retirement savings to purchase a longevity annuity. According to her contract, she will start receiving monthly payments of $800 starting at age 85, giving her a predictable income stream to supplement other retirement income.

Mitigating Longevity Risk

The most significant benefit of longevity annuities is their ability to mitigate longevity risk – the risk of outliving one’s savings. By beginning payments later in life, typically around age 80 or 85, they provide financial security when other sources of income may have run out.

Example: Imagine Robert, who retired at 65 with ample savings but is worried about the longevity risk. He decides to invest in a longevity annuity. Robert lives to the age of 95, far outliving many of his peers. Even though his other retirement savings have been exhausted by the time he is 90, his longevity annuity kicks in at 85, providing a consistent income stream to support his needs during his last decade.

Protection against Inflation

Some longevity annuities include features that can help protect against inflation, such as cost-of-living adjustments. This ensures that your annuity income will keep pace with rising costs, maintaining your purchasing power.

Example: Now let’s take Susan, who bought a longevity annuity at 65 with an inflation protection clause. Susan begins receiving payments at age 85. Because of the inflation protection feature, her initial annual income of $15,000 grows each year with inflation, ensuring that her purchasing power remains consistent despite rising prices.

Longevity Annuity

How to Buy a Longevity Annuity

Purchasing a longevity annuity isn’t much different from buying any other insurance product. However, here are a few things you need to consider:

When to Start Payments

Choosing when to start receiving payments from your longevity annuity is crucial. Remember, the later you begin, the higher your payments will be. However, this also means that you’ll need to use other sources of income until those payments start.

Example: James, a healthy 60-year-old with a family history of longevity, purchases a longevity annuity. He decides to defer payments until he reaches the age of 85 to maximize his potential payout. By doing so, he ensures a steady income late in life when his other assets might be depleted.

Deciding on the Payout Structure

Longevity annuities offer various payout structures, from payments for life to payments for a certain period. The right choice depends on your circumstances, health status, lifestyle, and financial goals.

Example: Emma, aged 65, buys a longevity annuity but is unsure of her life expectancy due to a pre-existing condition. To safeguard her investment, she opts for a period-certain payout structure. This guarantees she or her beneficiaries will receive payments for at least a defined period (e.g., 20 years), regardless of whether she has outlived the period.

Choosing the Right Provider

Not all annuity providers are created equal. Selecting a reputable insurance company with a solid financial rating is vital, as they will be responsible for making your annuity payments in the future.

Longevity Annuities

Longevity Annuities in Action: A Real-Life Example

Consider John, who, at age 65, buys a longevity annuity for $100,000. His contract stipulates that he will start receiving payments at age 85. Based on his contract, John could receive an annual income of around $22,000 starting at age 85 for the rest of his life, providing a significant income boost during his later years.

What Is A Longevity Annuity

Next Steps

The beauty of a longevity annuity lies in its simplicity and predictability. By transforming a portion of your savings into a guaranteed future income stream, you can alleviate concerns about outliving your retirement funds. Whether deep into retirement planning or just beginning, consider longevity annuities as a tool for long-term financial security. After all, peace of mind is truly priceless.

Longevity Annuity Retirement

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Frequently Asked Questions

What are the benefits of longevity annuities?

The most significant benefit of longevity annuities is their ability to mitigate longevity risk – the risk of outliving one’s savings. They also provide protection against inflation and can act as a personal pension plan

What are some potential drawbacks of a longevity annuity?

One potential drawback of longevity annuities is that they reduce liquidity, as the money used to purchase the annuity is tied up until payments begin. Additionally, the money used to purchase the annuity is subject to market movements and cannot be recovered if needed in an emergency.

Can I make withdrawals from my longevity annuity?

This depends on the type of annuity you purchase. Some annuities may allow for early withdrawals, but this will usually reduce the value of your payments and could also incur additional fees. Speak with your provider to determine if your contract includes any withdrawal provisions.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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