Millions of Americans are poised to enter retirement in terrible financial shape. Fully 42% of them have $10,000 or less socked away for their future, per a recent GOBankingRates survey. Many of them are aware of their predicament, too, with the "2017 Retirement Confidence Survey" finding that 39% of respondents are not confident that they'll have enough money for a comfortable retirement.
Fortunately, there's a way to shrink your odds of running out of money in retirement: the deferred annuity -- sometimes called a longevity annuity or longevity insurance.
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The downside to a long life
The idea of a very long life is typically appealing, but there's a downside to it, too, for many people: It means the money they socked away for retirement will have to last an extra-long time. The average age at which people retire these days is 63, so a typical retirement lasts from about age 63 to about age 81. Of course, that's just an average. While many people will die younger than 81, many others will live longer. An increasing number of Americans are even making it to age 100. Here are the chances of living to various ages, via Vanguard, using data from the Society of Actuaries:
Clearly, many of us will live rather long lives.
Annuities in a nutshell
When buying an annuity, you typically hand over a lot of money to an insurance company in exchange for a bunch of regular payments over time. It's not quite that simple, though, as annuities come in many varieties: immediate vs. deferred (paying you immediately vs. starting at some point when you're older), fixed vs. variable (certain payouts vs. payouts tied to the performance of the market or part of the market), and lifetime vs. fixed-period (paying until death vs. paying for a certain span of time). For many, if not most, people, a fixed annuity, whether immediate or deferred, is the best choice, as variable and indexed annuities tend to be more problematic, with high fees and/or restrictive terms, among other issues.
Annuity contracts will be more generous when interest rates are higher, but the chart below shows how much income they might deliver at recent rates. (Note that these figures are for immediate annuities -- we'll get to deferred annuities shortly.)
The deferred annuity
Deferred annuities will offer you more income for your dollars than immediate annuities, because the insurance company gets to hold on to your money -- the price you paid for the annuity -- for a while before paying you anything, and it can invest that money, growing it. They're called "deferred" because they're designed to begin paying you later in life, such as beginning at age 80, in order to help prevent your running out of money.
The chart below shows some representative incomes at recent interest rates:
If you're pretty sure your nest egg will last you from the beginning of your retirement until you're 80, you might buy a deferred annuity now that begins paying you at age 75 or age 80. That's a great way to ensure that you never run out of money. In fact, buying a deferred annuity that provides enough money to live on at, say, age 80, can mean you only have to have enough other savings to last you to age 80. That removes a lot of uncertainty and worry.
Alternatively, if you're still many years from retirement and you've saved a lot of money already, you can buy a policy now that begins paying when you expect to retire. You'll forfeit a big chunk of change to do so, though, and that money will no longer be growing for you. Still, after crunching some numbers, you may find it's worth it.
With deferred annuities, the longer the time span between when you buy and when you begin collecting, the lower the price should be. These annuities can pay you in regular installments or with a lump sum.
A particular plus of the deferred annuity is that it pays you at a time in your life when your interest in managing your money -- or your ability to do so -- may have shrunk. As we age, many of us become at least somewhat cognitively impaired and the decisions we make may no longer be as sound as they used to be. Even if we reach old age with all our faculties intact, we may no longer want the responsibility of making lots of financial decisions regarding which stocks or bonds or funds to buy or sell, and when to do so. Enter the deferred annuity. It will just kick in at a time you have designated, paying you regularly.
A deferred annuity can also serve as a kind of long-term-care insurance. If you want to have some guaranteed income available, should you need it for that, beginning around, say, age 75, you can buy a deferred annuity. There's a good chance it will be a better value than long-term-care insurance, which can be very costly and doesn't deliver unless you actually end up needing the care. With a deferred annuity, you'd receive the income to spend on long-term care or whatever else you'd like.
It's now possible to buy annuities through employer-sponsored retirement accounts such as 401(k)s and also through IRAs. Another option is buying into an annuity over time, such as through Blueprint. The folks at Blueprint, a pension services company, explain: "You can start a Personal Pension with just $5,000, and contribute in (optional) installments as small as $100. Each contribution locks in a guaranteed amount of monthly retirement income and continues as long as you live."
Annuities make a lot of sense for many of us, especially those without employer-provided pensions. Learn more about annuities before you buy one, though.
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