Betting on Getting to 80: Draw $40,000 a Year Forever, If You Don't Die First
Sharon Carson admits she just did something strange.
At 49, she wrote a check to an insurance company for a product that won’t give her any financial benefit until she's in her 80s.
Carson, a top executive in JPMorgan Chase’s retirement business, knows that buying a longevity annuity can pay off. On July 1, the U.S. Treasury pushed more savers to follow in her footsteps. Its new rules could allow the annuities, also known as longevity insurance, as an option in millions of Americans’ individual retirement accounts and 401(k) retirement plans.
The challenge: convincing savers to choose that option. The annuities thrill retirement experts and policy makers who see them as a way to ensure workers don’t end up impoverished in old age. Just about everyone else ignores the products, which make up less than 1 percent of all annuity sales.
It can be a great deal. With $125,000, a 60-year-old man can buy a policy from New York Life that guarantees an income of almost $45,000 a year starting at age 80. The same $125,000 in a regular retirement account would need to grow at the unlikely rate of 11 percent a year from age 60 to 80 to provide that income, assuming 4 percent is withdrawn annually after age 80.
Since women live longer than men, their longevity policies are more expensive -- and more valuable. Millions of widows in their 80s and 90s end up living on Social Security alone. A 60-year-old woman who puts $125,000 into one of these annuities could get an annual payout of $35,268. For Carson, with no children and a husband “who is not quite as healthy as I am," her longevity benefit is a hedge against long-term care costs. "I may be on my own later in life," she says.
Dollars in longevity policies go farther for those who buy earlier than 60 or start the benefit later than 80. If the insurance becomes common in retirement plans, the cost of policies should fall. To maximize her payout, Carson decided against buying inflation protection and a provision that refunds all the money she put in if she dies early.
Indeed, the oft-repeated big "risk" with longevity insurance is that buyers could die before they collect. But that chance is what allows the policies to be so lucrative for the long-lived. Those who die early help pay for those who live into their 90s and later. And even if you die at 75, the guarantee of income at 80 means you can tap the rest of your nest egg earlier without worrying so much about running out of money.
For longevity insurance to catch on, it needs to gain a foothold in retirement plans. The Treasury rules let workers devote as much as 25 percent of their 401(k) to the products, up to $125,000. That doesn't mean employers will offer the option or that workers will choose it. "It's going to be a hard sell in the short term," says Harry Conaway of human resources consulting firm Mercer.
Employers face legal liability for their retirement plan options, making them cautious about relatively unproven products. Insurance companies may need to come up with new kinds of longevity annuities that are "transparent and low fee" and don't discriminate against women, says Karen Friedman of the Pension Rights Center.
Adding to the resistance is a widespread assumption that Americans don't want to lock up their cash in insurance products. They'd rather get big eventual lump sum payouts -- even if they have no idea how to turn that into an income that will support them in old age.
If longevity insurance takes off, it will be a victory for experts who want to change that mindset. They would love 401(k) plans to look more like traditional pensions or Social Security, with savers focused less on the balance in their account than on the income it will eventually produce. That's an outlook your 100-year-old self may well appreciate.More stories by Ben Steverman:
- The Riskiest Housing Markets in the U.S.
- How to Boost Your Social Security Check By 76%
- The Good News About the Crushing Costs of Retiree Health Care
- Vacation-Phobic Americans Donate a Million Years of Work Annually
- How to Beat Inflation: Skip Kids, Cars, Getting Old
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