Are you afraid of outliving your assets in retirement? Do you fear you may not have saved enough to last well into your golden years if you live longer than expected? If so, a longevity annuity may be worth considering. In an age where employers are making a contribution to defined plans such as a 401(k) automatic people are saving more than they were a decade ago. In a survey by the Employee Benefit Research Institue, 55 percent of workers were somewhat confident that they had saved enough for retirement. Of those, 18 percent were extremely confident that they had saved enough. Not bad considering many people in the US as a whole have less than $10,000 saved according to many articles I have read.
While it is correct and true that people are indeed living longer today than they were 20 or 30 years ago there is an interesting phenominum occurring. In many instances, people are not spending their saved funds from sources such as a 401(k) but rather spending far less than they can afford. By doing this, people are leaving excess funds and may be living a substandard quality lifestyle due to the fear of running out of money. If you are afraid of either of these scenarios, it may be time for you to seek the assistance of a financial planner.
But if you are indeed one of the people who fall into the category of being afraid of outliving your assets enter the longevity annuity. These are deferred income annuities where a premium is paid in exchange for a stream of payments that will start at some point in the future. With the initial costs of these annuities being much lower than one that starts immediately it does make them somewhat attractive. And the best part is these annuities allow you to make sure you will have an income stream later in life and place you in a position to better plan your retirement assets.
In the last year, the IRS has provided a boost to these annuities. Last July it was ruled that people may put the lesser of 25 percent of their IRA assets or $125,000 into a qualified annuity contract or QLAC. The QLAC starts paying at a later date or when a certain age is reached by the owner. And as a bonus of sorts the assets in the QLAC do not count towards the calculation of the minimum distribution of the IRA. Shortly after the IRS’s initial ruling the Treasury Department along with the IRS provided guidance that allowed employers to have annuities in their sponsored 401(k) plans as well provided they are in target dated funds.
But is a longevity annuity the right asset for you to own? That depends on the individual and their needs. With interest rates at historic lows still they may not be all that attractive presently. But if interest rates were to raise the longevity annuity might be an extremely attractive asset for someone to employ in their retirement planning process. A second factor to consider is the inflation factor that will affect one’s payments and their purchasing power in the future. While inflation is also at historic lows that may not always be the case in the future. And a third factor that many people fear is that they will die before the payments start or that they will die prior to receiving the principal that they have paid for the annuity.
Now, one major difference between a QLAC and any other annuity that can be purchased on the open market is they are gender neutral in nature. In the private market, women will have a longer longevity factor resulting in lower payments while men are the opposite. QLAC do not distinguish between the sexes and thereby create a situation that may not be ideal for some. In a QLAC, the payment will be more than a private man’s and less than a women’s due to their gender neutrality. This means women should expect lower payments when compared to the private market and men slightly larger ones.
And if your fears are on inflation and dying prior to your payments begin there are riders for the policy to address those fears. But as with everything these riders come at a cost. And the cost is not always apparent in these financial products by design. If you do purchase, a rider such as one for these issues make sure to ask the selling agent what the cost is and have them explain it to you in its entirety. These hidden costs and other factors do tend to make it hard to shop around for an annuity as each company treats and handles these things differently. Also, remember that an annuity is an extremely complex financial tool, and many sales agents do not fully understand what it is they are selling. Make sure you do your due diligence and understand the product entirely. And it is also important to make sure the issuing insurance company is stable and financially sound as you will need them to be around possibly for decades.
For more information on this subject, feel free to contact me.
