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Worried you'll outlive your savings? Here's help

New rules mean that longevity annuities -- insurance against outliving your money -- are more attractive for retirement savers.

By MSN Money Partner Jul 22, 2014 2:08PM

This post comes from Marilyn Lewis at partner site Money Talks News.

Money Talks News on MSN MoneyWorrying that you could outlive your money? If so, you're not alone.

Senior man © Brand X Pictures/JupiterimagesIn the past it was common for employers to provide a pension plan, known as a defined benefit plan. These plans, like Social Security, provide a monthly check you can't outlive. Today, however, more companies shift the retirement burden to employees by providing a 401k or other savings-type plan. These plans, known as defined contribution plans, allow the employee to save money in a tax-advantaged investment account they can draw on in retirement.

The problem? No matter how much you build up in a 401k, you won't have a predictable, or necessarily comfortable, income for life. That's not a relaxing feeling for those entering into what are supposed to be relaxing years.

The insurance industry long ago recognized this problem and created a solution. It's known as a longevity annuity -- an investment you fund now that guarantees you a future income stream for life.

Sow now, reap later

Here's how it works: With a longevity annuity, also known as a single premium deferred annuity, you pay a lump sum, then wait a period of time before collecting your stream of income for life.

The younger you are when you buy the policy, and the older you are when you collect, the lower the price. "Not everyone will live beyond 80 or 85, so those who do so can collect more income than they would have been able to produce on their own," Reuters says.

Longevity annuities aren't new. But they're a hot topic now because the government recently changed the tax rules, making them more attractive and more accessible to retirement savers.

USA Today explains:

The Treasury Department and the Internal Revenue Service (IRS) just gave IRA owners and 401k plan participants the green light to invest in longevity annuities inside their retirement accounts, without having to worry about laws that require minimum distributions (RMDs) from those accounts after age 70½.

Why buy a longevity annuity?

The obvious answer is to have an income stream for life. The newly approved products -- called "qualifying longevity annuity contracts" or QLACs -- are:

  • Exempt from required minimum distributions. When you invest in 401k plans and IRAs, the IRS requires that, after you are 70½, you have to withdraw at least a minimum amount each year. QLAC longevity insurance is exempt; you can keep your money in the account until your scheduled payouts begin.
  • Priced identically for women and men. Women generally live longer than men, and so they'd typically be required to make a larger initial investment to get the same monthly lifetime benefit from an annuity -- up to 25 percent more, according to USA Today. But employer plans use unisex mortality tables, so women and men will pay the same price.
  • Sometimes offered with death benefits. Longevity annuities may offer an optional return-of-premium death benefit. That means if you die before receiving at least as much as you've put in, premiums paid but not received can be returned to your account. Choosing a death benefit, however, can reduce your monthly payments.
  • Sometimes offered with inflation protection. Products vary, depending on your company and the insurer, but inflation adjustments are a feature of some -- for a fee, of course. Joseph Tomlinson, managing member of Tomlinson Financial Planning LLC in Greenville, Maine, told USA Today, "The ideal would be a product that paid out in real dollars, adjusting for inflation during both the deferral period and the payout period."

To learn all of the details, read the new Treasury Department regulations.

Costs and the payouts

Costs will vary, depending on your age and when your payout starts, and on whether you purchase features like a death benefit or inflation protection. They will also vary wildly depending on which company you choose.

According to Consumer Reports, a 65-year-old man making a $100,000 contribution can expect to receive from $36,000 to $62,000 annually upon reaching age 85, depending on the company issuing the contract. That's a big spread and underlines the need to shop carefully.

Should you buy?

The new rules let you use up to 25 percent of your IRA or 401k account balance or $125,000 (whichever is less) to buy a qualified longevity annuity.

The idea is not to invest all your savings in these products. There's safety -- and perhaps better returns -- in diversifying your investments. You'll need a portion of your retirement savings accessible in case you need to make big withdrawals.

Another factor to consider: Annuity payouts are tied to interest rates. You might regret locking your money up now, when rates are at historic lows, if rates rise a few years down the road. Investing when rates are higher means a higher income when you start taking payments.

You'll need to look at your overall financial situation to know if one of these annuities is a good fit. A smart way to do that is to hire a fee-only certified financial planner for a few hours to make sure you're covering all your needs and seeing all the options.

Competition is coming

One attraction of these annuities is that the assurance of a guaranteed income stream later allows you to safely withdraw more from savings during your early retirement years.

One downside is that, unless you pay extra for inflation protection, the value of your payout will be diminished over time.

But there's probably time to wait and see what the market does in response to the changes. "Expect heightened competition to improve the policies," Reuters predicts.

Not for long-term care

If you are at retirement age now and are hoping to cover the costs of long-term care, an annuity probably is not the right tool. With the high cost of assisted-living facilities and full-time nursing care at home -- the median cost of assisted living is more than $3,500 a month -- you'd need to make a large investment to get a payout large enough to cover your needs. And your principal will be tied up in the annuity.

Will you have enough savings to retire?

More from Money Talks News

Jul 22, 2014 4:24PM
THE U.S. GOVERNMENT IS SEEING TO IT!!!!!!!!!!!!!!!!!!!!

Excellence is punished.
Mediocrity is rewarded.
And dependency is to be revered.
This is present day America.
When people rob banks they go to prison.
when banks rob people they get bailed out!!!!!
When the government robs the taxpayer they get re-elected.

Jul 22, 2014 4:22PM

 "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
   ~ Senator Barack H. Obama, March 2006


Jul 22, 2014 4:41PM
The country has changed. Companies and many employers no longer see their workers as assets but liabilities. Reduced wages and hours an benefits have been the result and  Maybe this is because in this global economy, new world order or whatever you may call it these people have no allegiance or personal investment in this country or the communities they up shop in. What does that mean for our future?  Lowered expectations for many of us. .
Jul 22, 2014 4:25PM

Just remember all the government has to do is print more money to make your savings shrink.

So if you have any and don't spend it, they will take it!

Jul 22, 2014 4:20PM
What savings??? In today's economy, many of us are living paycheck to paycheck.
Jul 22, 2014 4:29PM

Feds blow $100 billion a year on incorrect payments
The Department of Health and Human Services and the IRS are 2 of the biggest offenders, but the food stamp program is a success story.

Between 2002 and 2012, federal agencies spent more than half a trillion dollars ($688 billion) on payments that should never have been made.

Every year, according to their own record-keeping, the agencies that administer major federal programs are now paying out more than $100 billion improperly, and even though they're aware of the problem, they recover only a tiny fraction for taxpayers. This adds up to huge losses for the U.S. Treasury.

Jul 22, 2014 5:54PM
If you are NOT worried about outliving your savings, you probably will.
Jul 23, 2014 11:22AM

Public schools in my area advertise free meals, no restrictions, you just have to be 18 or younger. Apart from the fact that this seems to encourage the lazy and dependent who live amongst us, I wonder why the people who paid for these schools with their tax money; for example, seniors, are not being offered free meals as well? Who knows, maybe some with a limited income would welcome it...and they certainly deserve it more than an illegal alien



Jul 22, 2014 4:39PM
cant worry about what our government has already taken or you will be sick of worrying and broke
Jul 22, 2014 4:44PM

" Worried you'll outlive your savings? "

hell no we have Obamacare


Jul 22, 2014 4:43PM
why worry our government likes to take care of everyone
Jul 22, 2014 8:30PM
Free housing, free nutritional assistance, free health insurance, free education, free phones, free retirement money, all brought to you by the tax paying public.  Why worry?  The federal government will take care of you.
Jul 23, 2014 9:16AM
Worried you'll outlive your savings?  NOPE! I am worried about running out of organic weed once it's legalized all over and the pharmaceutical companies get involved in the weed industry.  
Jul 23, 2014 10:58AM
Save and invest most of your money for your entire life.  Spend at a minimum level.  You will reap the benefits.
Jul 23, 2014 11:02AM
I can't see this as being a big issue for most people. You would have to have a great deal of money in your IRA to make it an attractive option. According to the government, 40% rely on Social Security for 80% of their retirement income. And 10 to 20% rely on SS for ALL of their retirement income. And RMD's depend on the relative ages of the spouses. So if the husband hits 70 and 1/2 and the wife is 11 years younger, then he has 29 years to get his money out of the IRA. If he has ,for example, $580,000 in an IRA and gets $2000 a month from SS, then his RMD would be $20,000 and it would not trigger taxation of his Social Security. I guess if you had a couple of million in your IRA, but they only let you invest $125,000, so again I don't see it as more than a gimmick to show how considerate the government is. Should we feel grateful?
Jul 23, 2014 1:28PM
Here is my take on it. If you have been frugal all your life splurge alittle its ok. Then just watch your money like you did when you were working and acumulating it. The ones that are going to get into trouble are the ones still supporting thier children and grandchildren.
Jul 22, 2014 4:20PM
 I won't outlive my savings. No chance. Oboob and his TBTF banker buddies will'bail in' my savings long before that.
Jul 23, 2014 1:46PM
"a 65-year-old man making a $100,000 contribution can expect to receive from $36,000 to $62,000 annually upon reaching age 85, depending on the company issuing the contract."

Talk about scumbag companies......

Chatr says he's mad because the government won't let you take SS before 62 so you can collect every penny you put in.  These scumbags make you wait until 85?  How many people even live to 85?  Estimated life expectancy (combined) for 2014 is 78.75 years.  In 2011, it was 76 for men and 81 for women.

That's a huge spred between $36K and $62K.  There must be some awful policies.

The insurance company gets to invest your $100K for 20 years, then you're lucky if you can even collect a dime (that is, if you and they are still around to pay you).

I wonder who makes out on that deal?????  Duh.
Jul 23, 2014 2:35PM

As companies started moving away from privately held pension funds and started putting the funds under the control of the elite Wall Street players, as the financial institutions started caring more about profits than community, as the government started being more concerned about and only able to work together on bills that benefit them, as the term terrorist became a household word, as the deaths of people became more the norm than the extraordinary news, as health providers and insurance companies were allowed to put a strangle hold on the individual who needs care,  the whole idea of being able to retire comfortably and live to a ripe old age slowly drifted away for millions of us. Nowadays, I do not care one bit about outliving anything because it won't happen.  While I still earn a living, I eat what I want, drink what I want, smoke what and when I want and basically do whatever I want.  The savings will have a much longer life than this fella will. 

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