Avoiding Outliving Your Assets

Here’s a review of the recent Treasury Department decision to allow longevity annuities to be purchased in some retirement plans. The article discusses the importance of using some annuities in retirement plans to reduce or eliminate the risk of outliving your money. Not much new here, but it’s a good review of the basic arguments and facts.

The long deferral period also means that longevity annuities are remarkably inexpensive relative to immediate annuities. At current prices, while a $100,000 premium will buy a 60-year-old male an immediate monthly payment of around $535, the same $100,000 premium will buy him a monthly payment of around $2,540 if purchased with a 20-year deferral. Practically speaking, this means that newly retired individuals need to spend much less to guarantee a given stream of income in late old age.

Academic work on longevity annuities has estimated that the optimal amount to spend on longevity insurance is about one-eighth of a retiree’s financial assets. Spending that amount leaves a majority of wealth available to ensure against other risks and to invest in other priorities, such as long-term care needs or leaving an inheritance to children, while still being protected against outliving one’s assets. During the waiting period before benefits begin, retirees can draw down remaining financial wealth, tap into housing equity, or continue to receive income from work to supplement Social Security and Medicare benefits.