16
Running out of money consistently rates as one of
retirees’ top worries: When respondents in an Allianz
survey were asked which they feared more, death
or outliving their assets,
61%
said they were more
worried about running out of dough.
Thus, it’s probably no surprise that retirees and pre-
retirees are so interested in maximizing any income
streams that will last throughout their lifetimes—
even if they end up living to be
100
. Articles about
wringing the most lifetime income consistently garner
some of the highest page views on Morningstar.com.
Lifetime income sources like Social Security, pensions,
and income annuities provide a hedge against
outliving one’s assets, guaranteeing that there’s at
least some money coming in the door even when
investors’ portfolios begin to run low. Regulations
from the U.S. Treasury Department released in
July pave the way for pre-retirees and retirees to
obtain additional longevity protection by allowing
them to steer part of their
IRA
s into what are called
qualified longevity annuity contracts, or
QLAC
s.
In contrast with immediate annuities, where you fork
over a lump sum of cash and the insurer immediately
begins sending you a stream of payments that
will last as long as you live, a longevity annuity starts
making payments at some later date. For example,
you might buy the longevity annuity when you’re
65
,
but it might not begin making payments to you until
age
85
. Because the time period that the deferred
annuity will pay out is shorter than is the case with
an immediate annuity—and because the insurer
can earn some interest on your premium before it has
to start paying you—it’s only logical that longevity-
annuity purchasers can receive a substantially larger
annual payment with far less of a cash outlay than
would be the case for immediate-annuity purchasers.
The new regulations put some specific parameters
around the use of longevity annuities within
IRA
s. The
annuity payments must commence by age
85
at the
latest, and the premiums paid for the annuity cannot
amount to more than
25%
of the individual’s total
balance, or
$125
,
000
, whichever amount is less. The
annuity also has to be very plain-vanilla: Inflation-
adjustment riders are allowable, but the payments
can’t be variable or equity-indexed.
Importantly, the new regulations also clear up what
had previously been the key impediment to putting
longevity annuities in
IRA
s and company retirement
plans: the role of required minimum distributions.
Under the previous rules, because the longevity
annuity doesn’t begin paying you anything until later
in retirement—often well past the
RMD
beginning
date of age
70
1
/
2
—any money that you had sunk
into it could not be used to meet
RMD
s. Under the
new regulations, the longevity annuity is deemed to
satisfy the
RMD
requirements. Because retirees
have much of their portfolios inside so-called quali-
fied plans, the new regulations effectively clear
the way for longevity annuities to become much more
prevalent in retirees’ plans.
‘The Most Pure Play of Hedging Longevity Risk’
For those concerned about outliving their assets
because they could live a very long time—well into
their
90
s, for example—longevity annuities can
help provide peace of mind. A retired investor who
owns such an annuity can plan for his portfolio of
stocks, bonds, and funds to last through a given time
horizon—say, until age
85
. If the individual is still
living beyond that date, the annuity payments will
help supply income in addition to whatever cash
flow the (possibly dwindling) investment portfolio
can provide.
David Blanchett, head of retirement research for
Morningstar Investment Management, says that
QLAC
s “are the most pure play of hedging longevity
risk” and are more effective than immediate
annuities for the purpose of longevity-risk hedging.
“Many retirees don’t need a guaranteed [source of]
income immediately; they want certainty around
Should You Add Longevity Protection to
Your Retirement Plan?
Portfolio Matters
|
Christine Benz
