SUPPOSE YOU RETIRED at age 65 and you knew it would all be over at 85. That would make generating retirement income relatively easy: You might spend 1/20th of your savings in year one, 1/19th in year two and so on. Problem is, there’s a decent chance you will live beyond 85. That is where longevity insurance can help.
Longevity insurance, also called a deferred income annuity, is essentially an annuity that pays lifetime income starting at some future date. Because there’s no guarantee that you will live that long, let alone collect a lot of income if you do, this has the potential to be a relatively low-cost way of dealing with longevity risk. For every $100 you invest in a deferred income annuity at age 65, you might receive $40 to $60 a year of income starting at age 85. For a precise quote, go to Fidelity.com, ImmediateAnnuities.com, IncomeSolutions.com or myAbaris.com. You could use perhaps 15% of your savings to purchase longevity insurance that kicks in once you turn age 85. Meanwhile, you might spend down the other 85% of your savings between now and age 85 using the strategy described in the first paragraph.
You can buy pure longevity insurance that pays only if you live to the specified age. But many folks, fearful they will die without getting any money back from their insurance purchase, opt for various guarantees. These guarantees carry a cost, which is paid in the form of lower future income.
Don’t like the idea of longevity insurance? You could designate 15% or 20% of your portfolio for the post-age 85 period. If you live that long and you’re in good health, you might at that juncture use this money to buy an immediate fixed annuity. If your health isn’t so good, you could simply spend down your remaining savings. What if you don’t live until age 85? The money could make a handsome inheritance.
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