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Why an Economist Says Your Clients Should Buy Annuities Early

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Anthony Webb has seen firsthand how COVID-19 can change everything: The New School economist has been trapped on an island in Greece for six months because of lockdown-related travel restrictions.

But the Alliance for Lifetime Income — an organization sponsored by the annuity production and distribution giants — managed to beam him in, via the internet, to an online Retirement Income Dialogues event it held last month.

The event was like a financial services continuing education event, if the agents involved were rocket scientists. One of the other speakers came from MIT’s AgeLab.


  • Links to Retirement Income Dialogues resources, which are available behind a log-in wall that has a free registration process, are available here.
  • An article about what Webb was writing in 2007 is available here.

Webb has a doctorate in economics from the University of California, San Diego. He has been a senior research economist at Boston College’s Center for Retirement Research and a senior research analyst at the International Longevity Center.

He’s now a senior fellow at the Schwartz Center for Economic Policy Analysis. As policymakers in Washington start to wake up from fun with town hall meetings and remember that the United States has a retirement savings problem, Webb may be one of the people who will help evaluate the rescue proposals.

Here are three things he said at the Retirement Income Dialogues event.

1. Medicaid nursing home benefits planning is critical.

Medicaid pays for acute medical care for poor people of all ages. It also pays for nursing home care for poor young people with catastrophic health problems, poor older people who can no longer live on their own, and middle-income older people who meet state Medicaid nursing home benefits eligibility requirements.

Traditionally, many insurance agents and insurance company executives have hated the idea of people with a decent income counting on Medicaid nursing home benefits to pay for nursing home care. They have seen Medicaid planning as a force for evil.

In the real world, Webb said, most American retirees have such skimpy savings, and the Medicaid program is so big, that about 20% of middle-income retirees end up using Medicaid benefits by age 90.

Many other people in their 90s would soon have to use Medicaid if they experienced expensive health problems, Webb said.

Another factor to consider, Webb said, is that, for typical older Americans, the home is the major asset.

Other economists analyzing retirees’ finances often assume that people can simply sell their homes if they need expensive long-term care, but, in the real world, they often can’t, Webb said.

One reason, he said, is that an individual who is using long-term care often has a spouse who is still living in the individual’s home. A second reason, he said, is that more than 60% of the people who enter a long-term care facility manage to return to the community. People who leave long-term care facilities alive need somewhere out in the community to live, Webb said.

Because of the way Medicaid eligibility and paydown rules work, for middle-income people, “Medicaid imposes an implicit tax on long-term care benefits,” Webb said.

Middle-income people with LTCI may be able to move into nicer facilities, with more flexibility, but they may not end up with much more cash left over than people without LTCI coverage, who simply start out using Medicaid nursing home benefits, Webb said.

2. Annuities perform Medicaid planning magic.

Medicaid programs leave the assets inside annuities out of nursing home benefits eligibility calculations, Webb said.

Because of that eligibility rule provision, a typical couple with an annuity may be able to keep hundreds of thousands of dollars more in assets than a comparable couple with no annuity, Webb said.

For a consumer with an annuity, simply having the annuity cuts the Medicaid implicit tax and makes more of the financial benefits from use of the private LTCI coverage flow to the consumer, rather than to the Medicaid program, Webb said.

“The lower Medicaid implicit tax is going to make long-term care insurance more attractive,” Webb said.

3. Consumers should buy annuities and long-term care insurance together, as early as possible.

Webb said consumers should buy annuities and LTC coverage together, at retirement or sooner, to protect themselves and their spouses from many different risks, such as the risk of sickness or decreases in interest rates.

Economists may model cases of consumers who put their assets in a big pot and simply draw down assets, but those theoretical models oversimplify, and “the models should not be used as a basis for retirement financial planning,” Webb said.

Buying an annuity together with the LTC coverage is important because of considerations such as the constraints an annuity puts on a consumer’s liquidity and the ability of solid LTC coverage to increase the consumer’s liquidity, Webb said.

— Read Future Retirees Could Be More Reliant on Social Securityon ThinkAdvisor.

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