17
Morningstar FundInvestor
August 2
014
how long they have to plan for their savings to last,”
Blanchett says. “That is why longevity annuities are
so attractive.”
Michael Kitces, a partner and director of research
for Pinnacle Advisory Group, agrees that longevity
annuities beat immediate annuities when it comes to
hedging against longevity risk. The best candidate
for such a product, Kitces says, “is someone who is
specifically afraid of living well into his
90
s and
beyond and is concerned [whether] he’ll have enough
money to fund a retirement that long.”
Balancing Behavioral and Financial Factors
Despite those attractions and the fact that longevity
annuities will be more readily available via
IRA
s,
the products aren’t without potential drawback. Just
as a purchaser of an immediate annuity faces the
chance that he will die before receiving a fair share of
payments, the buyer of a longevity annuity risks dying
before or shortly after payments commence.
The psychological risks of parting with a sum of
money that never provides a benefit is one reason
that many retirees avoid the products, even though
data indicate that annuities can be an attractive
part of retirees’ tool kits.
Kitces points out that some products do offer a death-
benefit guarantee, so that your estate receives at
least your principal if you never receive payments
from the annuity. But, Kitces says, adding in this
protection will also reduce the benefits you’d receive
if you lived. “If you get guarantees for both sides—
if you live, and if you die—you just end up with a very
mediocre combination guarantee that doesn’t do
much for either.”
Kitces also noted that, given today’s low interest
rates, longevity annuities don’t necessarily offer an
attractive “return” relative to conservative invest-
ment types. In other words, unless you live a very
long time and are able to wring a large amount of
payments from the annuity, you may have been better
off avoiding the products and just investing
conservatively instead.
But Blanchett believes that would-be purchasers of
longevity insurance are better off thinking of it as an
insurance product. You may well lose money on the
deal, but you’ve obtained something that’s impossible
to quantify: peace of mind. “Someone buying this
should be buying it as a pure insurance policy and
shouldn’t be too focused on the internal rate of
return,” he says. “I’m not saying one shouldn’t be
aware of the cost, but it’s only part of the equation.”
How Much Is Enough?
Assuming one has decided to steer a portion of a
portfolio to a longevity annuity, what is the right
amount to steer toward it?
For Blanchett, the timing of the start date is the key
swing factor. The further the start date (and remember,
85
is the latest date for payments to start for some-
one buying a
QLAC
within an
IRA
), the smaller the
allocation should be. He suggested that for a
65
-year-
old purchasing a
QLAC
that will commence payments
at age
85
,
5%
to
15%
of the portfolio is a reasonable
ballpark percentage. He also urged would-be annuity
purchasers to factor in other certain sources of life-
time income, such as Social Security, when deciding
how much to sink into a longevity annuity.
Kitces notes that many purchasers of longevity annui-
ties think about the baseline living expenses they’d
like the product to supply and use that to inform how
much they sink into the contract. But he also points
out that even as some longevity policies guarantee a
cost-of-living adjustment once payments commence,
they don’t guarantee inflation adjustments between
the time you purchase them and the time payments
start. That means that forecasting how much you’ll
actually need “turns into a bit of a guessing game.”
Blanchett also points out that the market for these
products is still pretty thin and there aren’t nearly as
many products available as in the single-premium
immediate annuity space. But given the new Treasury
Department ruling, he says, “I’m guessing this will
improve as [the products] increase in popularity.”
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Contact Christine Benz at
