How to make sure your cash lasts as long as you do

By Margarette Burnette Posted : 08/17/2011

Longevity insuranceConcerned about running out of money after you retire? You're not alone. A Gallup poll released this summer found that 66 percent of Americans are very or moderately worried about having enough money for retirement.

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One of the obvious challenges of planning for retirement is that you typically don't know how long you're going to live, says Bennett Kleinberg, vice president and senior actuary at MetLife Insurance.

"If you spend too much in retirement, you risk running out of money," he says. "And if you spend too little, you could have maximized your lifestyle more."

Longevity insurance, also known as a deferred-income annuity, helps solve this dilemma. When you buy this type of policy, it allows you to structure your investments to cover a specified amount of time after you retire, says Kleinberg.

Once you pass that period of time, payments from your longevity policy kick in, providing additional income as long as you're alive, she says.

Ease of planning

The typical person who benefits from longevity insurance buys a policy upon retirement at age 65 but doesn't start receiving the benefit until around age 85, says Lynn Ballou, a managing partner at Ballou Plum Wealth Advisors in Lafayette, Calif.   

That age isn't set in stone – many companies will let you choose the time you start receiving income, even if you're in your 70s, she says.  But the general rule is that the longer you defer payment, the more income you'll bring in when you start receiving the benefit.

Although longevity insurance is a type of annuity, it offers a higher income stream compared with other annuity products, says Kleinberg. The payout is larger because you're deferring income, allowing the amount you invest to grow over many years.

Your money grows exponentially because it compounds at a certain interest rate, says Ballou.  The rate of return depends on the insurance company that sells the product and the current market rates at the time you bought the insurance, she says. 

Your company can tell you what your income would be when you make withdrawals, so you can plan ahead, she says.

"People who are very risk-averse may feel more comfortable with longevity insurance," says Ballou, who's also a Certified Financial Planner and ambassador for the CFP Board of Standards. "It's an election that's made to protect oneself from volatility in the rest of their portfolio."

Based on summer 2011 rates, if you're 65 and buy longevity insurance for $25,000 (with no death benefit), you can expect to receive an income of about $18,000 per year starting at age 85, says Kleinberg. If you buy $100,000 at age 65, your annual income at age 85 would be about $72,300.

By contrast, if you buy an immediate annuity for $25,000 at age 65, you can start receiving money right away – but the annual income would only be about $1,770 (with 10 years of  guaranteed income), says Kleinberg.

According to the CDC, life expectancy in the U.S. is 78.2 years. So, insurance companies don't expect everyone who buys longevity insurance to receive a payout, Ballou says. However, if you do live for a long time, longevity insurance minimizes the risk that you'll run out of retirement savings, she says.

Longevity insurance is available in a range of options. With a traditional longevity policy, you don't receive any income during the deferral period and there is no death benefit for your heirs.

However, other versions of longevity insurance pay out less income, but give you more options. For example, some policies provide a death benefit for heirs, just as with life insurance. Some companies also offer an option where you can make payments toward your longevity policy instead of buying it with a lump sum of your savings, Kleinberg says.

Interest rates affect payout

Although longevity insurance has been around for years, it's not as popular or widely known as other types of retirement products, says Ballou.

Since current interest rates are at near-historic lows, your money won't compound as quickly as it would if interest rates were higher, and that could mean relatively lower payouts in the end, she says.

"In this day and age, with interest rates as low as they are, most people aren't rushing out to put all their money into this type of product," she says.

Instead, some people are taking a wait-and-see approach. They believe that if interest rates go up, they may get a better deal on a policy later, Ballou says. 

If you do purchase longevity insurance, experts agree that you shouldn't spend your entire savings to buy a policy.

She suggests researching any insurance company before writing them a check, just as you would do with any other financial partner. To be safe, select an insurance provider that has a high score from an independent rating agency, such as A.M. Best, Ballou says.

Kleinberg suggests that a typical 65-year-old should put 10 percent to 15 percent of savings toward buying longevity insurance, while also diversifying retirement savings.

"You can take an unknown horizon and turn it into a known one of 20 years," he says.

However, your own circumstances may vary, so consider consulting with a financial planner or other adviser when planning your retirement.

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