The biggest challenge that retirees face when they set aside money for later in life is figuring out how to make their savings last as long as they need to. With life expectancies making it likely that those who reach retirement age will have 20 to 30 years of living expenses to cover after they leave their careers, the threat of running out of money is a very real one.
There’s a financial product that directly addresses these concerns by providing guaranteed income later in your retirement years. Known as longevity insurance or deferred income annuities, these products are designed to let you exchange a modest amount of savings earlier in your life for the promise of income when you need it most. With many younger workers becoming increasingly concerned about whether Social Security will be there when they need it, the prospect of using longevity insurance to produce reliable monthly income is even more attractive.
What is longevity insurance?
The Employee Benefit Research Institute recently released its 2018 Retirement Confidence Survey, which includes a host of different issues facing retirees and workers. One question focused on the desire among those in both groups about whether they’d be interested in longevity insurance.
The structure of the survey question itself defines what longevity insurance really does. Longevity insurance is a product offered by life insurance companies that involves your spending a portion of your retirement savings by paying an up-front premium, often in your 60s either shortly before or upon retirement. In exchange, the insurance company promises to make monthly payments once you reach a certain age in the future, typically 80 or 85.
If you die before you reach the payout age, then you’ll typically forfeit the amount that you paid in your upfront premium, although some insurance products give you options that result in slightly different outcomes. Once you hit that age, though, you’ll start getting monthly checks, and they’ll last the rest of your life.
What people want
The survey’s results were interesting. Among those who’ve already retired, interest in longevity insurance was relatively small, with just 15% of retirees saying they were at least somewhat interested in purchasing such a product with 10% of their savings. However, when you look at workers who haven’t yet retired, interest levels were quite a bit higher, with roughly 48% being interested in spending at least a portion of their retirement savings on longevity insurance.
What’s especially valuable about longevity insurance is that the income payments can be meaningful even with current low interest rates. For instance, a 65-year-old man can put $100,000 into a longevity insurance product and expect income of $25,000 per year upon reaching age 80. That compares with just $6,500 in annual income from an immediate annuity that starts paying a 65-year-old immediately upon purchase. The deferred nature of the payments means getting more money later in your life when you really need it.
Many people are skeptical that they’ll live long enough to reap the rewards of longevity insurance, but the odds are actually better than many think. There’s about a 40% to 50% chance that a 62-year-old will live to 85, and almost 1 in 3 women who are 62 right now will live to age 90.
The best strategy to let your money survive
No one would recommend using longevity insurance for all of your retirement savings, since you need to be able to support yourself until you reach the age at which the payouts will start. Yet by putting a small amount of your savings into such a product, you can go a long way toward ensuring that your income later in life will be higher even as your other assets start to run out. Combined with Social Security, that level of secure income will make you feel a lot more financially comfortable throughout your retirement.