Retirees face a difficult decision: Should they self-insure their retirement income and attempt to develop an asset- and income management plan that they hope they won’t outlive? Or should they insure against longevity risk and accept the trade-offs that go with that approach?
A study from the Brookings Institute, “Better Financial Security in Retirement? Realizing the Promise of Longevity Annuities,” considers these issues in-depth. Authors Katharine G. Abraham and Benjamin H. Harris discuss how the retirement savings system in the U.S. has changed in the past 25 years. Defined benefit participation is lower and defined contribution participation, often as the sole savings plan for employees, is higher. The widely recognized result: employees are shouldering much more of the risk associated with managing retirement savings to ensure lifetime income.
Longevity annuities could be part of the lifetime income solution, the authors note, and they are gaining greater acceptance. LIMRA Secure Retirement Institute reported that sales of deferred income annuities (DIAs) were up 35 percent from 2013 to $2.0 billion for the first nine months of 2014.
However, it’s not clear if DIA buyers using the products primarily as longevity annuities. The authors report that 44 percent of buyers from one major provider during the period of July 2013 to August 2014 were age 59 or younger. Additionally, they note: “…approximately two-thirds of the annuities sold had deferral periods of five years or less, with only one percent having deferral periods in excess of 15 years. The young purchasing age, coupled with the short deferral period, suggests that few annuitants are using deferred-income annuities to protect against longevity risk.”
The new Treasury regulations on qualifying longevity annuities (QLACs) could help spur longevity annuities’ adoption for longer periods, Abraham points out in an email response. Several insurance companies that weren’t in the market have told her they have started to develop longevity annuities. Getting consumers to adopt the products will require changes, however. “In order for these products to really take off, though, it’s also going to be important to make changes to reassure employers that they aren’t taking on undue risk by offering a longevity annuity option in their retirement plans,” she writes. “The other thing that will be important is helping people who are nearing retirement understand that there is a good chance they will live longer than they expect and that products like these can be a cost-effective way to ensure a continuing stream of income if that happens.”
Retirement advisors also can influence adoption by clients, although how advisors present the products will be important. “One thing I sometimes hear is that, if a person buys a longevity annuity and doesn’t live long enough to collect, the money will have been wasted,” she says. “That’s not really the right way to think about these products. What they are offering is insurance against outliving your assets. Even if the holder of a longevity annuity never collects a dollar, they will have enjoyed the peace of mind of knowing they had that insurance in place, and if they do collect benefits, those benefits will be higher because their cost is partly underwritten by the premiums from people who did not live long enough to need them.”