Live Long and Prosper
I wish I had known about the longevity annuity a year ago. I might have saved myself some money.
The longevity annuity is an innovative new product, just beginning to gain traction. More formally known as an advanced life deferred annuity, it is also "an annuity people might actually buy," as a recent paper by Anthony Webb, Guan Gong and Wei Sun for the Center for Retirement Research at Boston College put it.
There are already annuities available that guarantee income for life, and many retirement experts will tell you they can be a useful part of a retirement portfolio.
And yet, investors generally shun them.
The more familiar immediate annuity provides a stream of payments for life, starting right away. By contrast, a longevity annuity kicks in its payments only if you live a long time -- for instance, past your 85th birthday.
The result? Protection at a lower cost.
For the same spending benefit at age 85, a consumer would have to allocate 50 percent of all her retirement savings to an immediate annuity compared with 10 percent to a longevity annuity, according to a paper by Jason S. Scott, retirement research director for Financial Engines of Palo Alto, Calif., a provider of independent investment advice and managed accounts to 401(k) plans. The savings from buying the longevity annuity would be the investor's to spend or continue to invest, which should make getting to 85 more fun.
Last year I bought an immediate annuity and began collecting on it, as most people who buy them do. Not surprisingly, people who buy immediate annuities generally are in good health and expect to live longer, guaranteeing that they will recover at least some of their upfront money in payments. However, take a similar pool of investors, put them in an annuity that pays off 20 years from now, and at least some of them will die without collecting. That means the insurance company can collect sufficient funds to cover the benefits at a lower cost to insurance buyers.
Immediate and longevity annuities are insurance policies. (There are other types of annuities, too, including variable annuities, which we'll get to in another column.) But the longevity annuity is more like the insurance policies we're used to, such as fire insurance, which you don't buy because collecting on it is a sure thing. Instead you buy it because you get protection from a possible disaster at a reasonable cost. Same thing with a longevity annuity. It's insurance that you won't end up living on nothing but Social Security if it turns out that there's more life at the end of your money than money at the end of your life.
So far only a few companies offer longevity annuities. The Hartford started selling its version less than two years ago. "Sales have been very modest," said Ken McCullum, Hartford senior vice president. He said he expects the market to grow because financial advisers are increasingly helping clients not just with investment and accumulation decisions but also with figuring out how to make the money last.
In the case of the Hartford product, the minimum age to be issued a policy is 40, and the maximum, 83. The earliest you can collect is 13 months after you've paid the last premium; the latest, age 85. It requires a minimum payment of $10,000, which can be made at once or over time.
If a 40-year-old man puts $10,000 into a Hartford longevity annuity today, he will begin to receive a monthly benefit of $2,550 for life at age 85; a woman's payout would be $1,840 a month. (Men receive higher benefits because they tend to have shorter lives.)