Never Outlive Your Savings: How Longevity Annuities Can Help
Americans are living longer than ever. According to the Centers for Disease Control and Prevention, the average 65-year-old today can expect to live at least another 20 years—six years longer than in 1950. While that’s great news for your golden years, it also raises a critical question: Will your retirement savings last as long as you do?
Some retirees address this challenge by working past age 65 or delaying Social Security. Others are turning to a lesser-known but powerful tool: the longevity annuity.
What Is a Longevity Annuity?
Also called a deferred income annuity, a longevity annuity is a contract between you and an insurance company. You pay a lump sum upfront, and in return, you receive guaranteed monthly income for life—starting at a future age, typically between 75 and 85.
This strategy helps protect against the risk of outliving your savings, especially in your later years when healthcare costs and inflation may rise.
Why Haven’t They Caught On?
Despite their benefits, longevity annuities remain underused. LIMRA reported that deferred income annuities made up just $1.7 billion of the $219 billion in total annuity sales in 2020. Many consumers hesitate to lock up a large sum of money, especially if they’re unsure they’ll live long enough to benefit.
However, for those who do live well into their 80s and beyond, the payouts can be substantial.
How It Works
Start by estimating your future income from Social Security and retirement accounts. Then project your expenses at age 85 and beyond. If you expect to need $50,000 annually and Social Security provides $30,000, you’ll need $20,000 from other sources—potentially a longevity annuity.
The longer you defer payments, the higher your monthly income. For example, a 65-year-old who invests $100,000 might receive $500/month immediately—but if they defer until age 85, that could rise to $2,800/month.
Qualified Longevity Annuity Contracts (QLACs)
If you’re using retirement funds, you can allocate up to $135,000 or 25% (whichever is less) from your IRA or 401(k) into a QLAC. This allows you to defer required minimum distributions (RMDs) and secure future income.
Refund Options
To ease concerns about dying early, many insurers offer refund features:
- Life with Refund at Death: Your beneficiaries receive any unused premium.
- Life with Period Certain: Guarantees payments for a set period, even if you pass away early.
Choosing a Provider
Always check the insurer’s financial strength rating. A highly rated company is more likely to honor long-term commitments and provide reliable income when you need it most.
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