With luck, many of us can expect to live to a very ripe old age. Are you prepared, however, for the financial implications of that possibility?
Today, individuals contemplating retirement frequently face the fact that the financial costs associated with retirement will fall largely on their own shoulders. Even though you may set aside funds, you may not set aside enough to cover your needs into very old age. In other words, you have to face the very real possibility that you might outlive your retirement accounts. How can you address the risk of outliving your savings? One option that might be worth considering is a longevity income annuity.
Longevity Income Annuities
A longevity income annuity (LIA), also referred to as a deferred income annuity or longevity insurance, is a contract between you and an insurance company. As the insured, you deposit a sum of money (premium) with the company in exchange for a stream of payments to begin at a designated future date (typically at an advanced age, such as age 80) that will last for the rest of your life. The amount of the future payments will depend on a number of factors, including the amount of your premium, your age, your life expectancy, and the time when payments are set to begin.
Caution: Guarantees are subject to the claims-paying ability and financial strength of the annuity issuer.
That’s the basic concept, although some LIAs might offer other options including:
- The opportunity to make additional premium contributions up to the date payments are to begin
- Cost-of-living adjustments that can increase annuity payouts
- Death benefit or return of premium to your beneficiary if you don’t live long enough to receive payments equal to the amount of your total contributions to the LIA
- The option to “cash out” the LIA prior to the time payments are to begin, although this usually involves surrender fees that likely will reduce the amount returned to you
Can an LIA be Used with a Tax-Qualified Plan?
A portion (or most) of your retirement savings may be held in tax-qualified retirement plans such as a 401(k), IRA, 457(b), or 403(b) plan. Can you purchase a longevity annuity within one of these plans? Yes, according to the final rules regarding LIAs issued by the U.S. Department of the Treasury and the IRS.
The press release announcing the final rules explains that, “as boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
In general, the final rules:
- Amend the required minimum distribution (RMD) rules so payments don’t have to be taken from LIAs to satisfy RMD requirements
- Set a maximum investment in an LIA to the lesser of 25% of the plan account balance or $125,000 (adjusted for cost-of-living increases)
- Provide individuals with the opportunity to correct inadvertent LIA premiums that exceed these limits
- State that the LIA must provide that payments begin no later than the first day of the month next following the participant’s 85th birthday, although the maximum age may be adjusted later due to changes in mortality
- Allow for LIAs to include “return of premium” death benefit provisions
- Expand the manner in which a contract can be identified as an LIA
- Provide that LIAs in qualified plans may not include “cash out” provisions, and no withdrawals are permitted in the deferral period, and, unless the optional death benefit or return of premium options are available, no payments will be made if the annuitant dies before the payment start date, although each of these restrictions may be found in LIAs that are not purchased within tax-qualified accounts
For more information, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
