Retirees are becoming a larger part of the population while their capacity to fund retirement comfortably has been declining. The population 65 and older, which now numbers about 48 million, is expected to rise to about 73 million in 2030. Meanwhile, the portion of retirees with employer-defined benefit plans that fund them until they die has been declining and is now less than one out of every 10. Most retirees must fund their own retirement, and face the risk that their funds will turn out to be inadequate and they will be forced to spend the last years of their lives living on social security alone.
What retirees need is a type of insurance policy in which those who die earlier help fund payments to those who die later. In fact, this type of policy now exists. It is called a “longevity annuity,” but that is a misnomer because it is actually an insurance policy. It insures against the risk of impoverishment from living too long. The best way to understand how a longevity annuity works is to compare it to a standard annuity.
In both cases, the consumer pays a large one-time fee at the outset and receives monthly payments for the rest of their life. On the most common type of standard annuity, the payments begin immediately. On other versions, the payments are deferred for some period but the consumer receives death benefits if they die during that period. On a longevity annuity, in contrast, payments are deferred until some specified age, as late as 85, and if the consumer dies before reaching that age, they receive nothing. In effect, the premiums paid by those who die before the deferral period are paid to those still living, which makes it possible to provide those still living with larger monthly payments. This transfer is what makes the longevity annuity an insurance policy.
Longevity annuities offer investors guaranteed income for life in addition to higher payouts than other contract types. Longevity annuities are strong options for those who are concerned that they may outlive their assets.
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RETIRE BEFORE YOU EXPIRE ⏰
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