Longevity annuities, also known as deferred income annuities, are fairly new. In them, you pay a lump sum to an insurer, usually when you are in your 50s or 60s. The insurer promises that at age 80 or 85 it will begin paying you a predetermined amount every year for the rest of your life, no matter how long you live. It’s a good way to ensure you never run out of money. The downside is that once you pass away there’s nothing for heirs, even if you pass away before receiving a dime from the annuity.
The Treasury Department just issued regulations expanding the use of longevity annuities in IRAs and 401(k)s. The rules say that you can invest the lesser of 25% of your account and $125,000 in a longevity annuity without worrying that future payouts won’t meet the required minimum distributions after age 70 1/2. Uncertainty over the rule prevented many IRA and 401(k) custodians from allowing the accounts to purchase the annuities. Details here.
Lifetime income products are evolving, and the availability of in-plan guarantees (products inside 401(ks)) is still in its infancy. The two main types of in-plan guarantees are longevity annuities (also known as deferred income annuities) and guaranteed lifetime withdrawal benefit (GLWB) annuities. A lifetime withdrawal benefit gives you some flexibility to stay in the market with a base guarantee. A longevity annuity allows you to buy a certain amount of income at a future date. Typically an employer offers one or the other.
The number of workers who have access to one of these two types of in-plan guarantees as part of their retirement plans grew to nearly 2.3 million, an increase of 28 percent compared to 2012, according to LIMRA, an insurance industry trade group. But only 49,900 workers elected an in-plan guarantee in 2013, up 5 percent from 2012.