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Will Retirees Come To Love Longevity Annuities?

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Economists love longevity annuities. But what will it take to get real people to buy them?

These retirement products work like this: At about age 65 you purchase an insurance policy that promises to pay out a guaranteed stream of income in 10 years or more—once you reach, say, 75 or 80. By making a relatively low single payment at 65, you get a guaranteed source of income that supplements Social Security and your 401(k) when you reach old age. That’s when you are likely to face additional costs for both medical and long-term care.

By deferring the payout, consumers can purchase a much larger income stream than with an immediate annuity. For example, a $50,000 immediate fixed annuity purchased at age 65 will pay about $275-a-month. But if you buy at 65 and defer income until age 80, you’ll get more than $1,200 every month—more than four times as much.

The idea got a boost last summer when the Treasury Department allowed people to shift a portion of their 401(k)s or IRAs into deferred annuities.  Under the new rules, an individual can invest up to one-quarter of his retirement account balance, to a maximum of $125,000, in the insurance product. Funds used to purchase the annuity are exempt from the normal rules that require minimum distributions from tax-deferred retirement plans starting at age 70 ½.

Many financial economists are big fans. They see longevity annuities as an inexpensive way to insure against the risks of very old age.

The market for deferred annuities has been growing. But single-premium products of any kind can be a tough sell. They are complicated and often come with hefty fees. Many buyers are skeptical of deferred payment insurance because they fear they will die before they get their initial contribution back. Others worry that inflation will erode the value of that far-off income stream.

There are riders to help allay those fears. You can buy inflation protection. Or a return of premium provision, where your heirs will get any portion of your initial investment that has not already been paid out in benefits. You also can arrange to have the income stream transferred to your spouse after your death. But, of course, all of these additional benefits cost money, in the form of lower payments or higher premium.

On Thursday, several retirement experts will tackle the challenges of longevity annuities at a Brookings Institution event. The program will begin with a presentation by Katherine Abraham of the University of Maryland, followed by two panels.

In the first, David John of AARP, Henry Aaron of Brookings, and Ben Harris of the Hamilton Project will debate the pros and cons of these investments. David Wessel of the Hutchins Center on Fiscal and Monetary Policy will moderate.

The second panel will include Mark Iwry, Treasury’s Deputy Assistant Secretary for Retirement and Health Policy; Donald Fuerst of the American Academy of Actuaries; and Iowa Deputy Insurance Commissioner  James Mumford. I’ll be moderating that discussion.