Longevity Annuities in Retirement Plans

by | Jul 3, 2014 | Asset Management, Podcasts

The Treasury Department released a report this week announcing that investors will now be able to purchase longevity annuities within their retirement plans. By retirement plans they mean 401k’s, IRA’s, and 403b’s. On this week’s podcast, Tom and Brendan discuss what a longevity annuity is and the pros and cons of purchasing one within your retirement plan.

The simplest way to describe a longevity annuity is that it allows you to purchase a certain amount of income for a date in the future. You can buy a guaranteed income stream that starts at whatever age you specify in the contract’s terms. Under these new rules, retirement plans will allow participants to use up to 25% of their account balance or $125,000 (whichever is less) to buy a longevity annuity within the plan.

One pro of the new rule is that if you purchase a longevity annuity you will never be able to outlive all of your money. The income payments will be guaranteed for the duration of your life. As far as we know right now, there doesn’t seem to be a cost associated with purchasing these longevity annuities within the retirement plans. However, that could definitely change since this is a very new development. Another pro to this feature concerns the money being returned to heirs upon the contract owner’s death. Normally when a contract has been annuitized, meaning monthly income payments are being taken, if the contract owner passes away the remainder of their investment goes to the insurance company. If they would like the remaining money to pass to an heir or spouse it costs extra. With these longevity annuities within retirement plans it seems that the heirs will receive the remaining balance of the contract owner’s investment in lump sum. There hasn’t been word as to the cost (if there will be one) of this feature, but it’s definitely a good one for investors (especially if it’s free).

Some cons to keep in mind include the fact that your money becomes illiquid when it is invested in an annuity. The money is not working for you. In fact, it’s working for the insurance company. They have guys that crunch numbers for them who let them know the probabilities involved with guaranteeing you income for life. They know for a fact that they can make money on the majority of their annuity sales. That’s why the offer these products. You could just as easily take your retirement account, invest it in a money market fund, and take monthly income from it all on your own. You’d also be able to adjust your monthly number based on life circumstances or withdraw larger amounts of money in case of emergency. Something else to keep in mind is the reliability of the insurance company making the guarantee. Will they be around when it’s time for you to collect your monthly income payments? And again, we aren’t aware of the costs this feature might have. If there are fees involved, they’ll certainly be another thing to be wary of.

These are all things to consider with this new development. Keep in mind that this situation is just that, a development. We’ll undoubtedly learn more in the coming weeks and months in regards to this announcement from the Treasury Department. Make sure to listen to this week’s podcast here or on iTunes to hear the full explanation from Tom and Brendan.

You can read more about this development here: http://www.forbes.com/sites/ashleaebeling/2014/07/01/treasury-green-lights-longevity-annuities-in-401ks-and-iras/

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