5 Things You Need to Know about the New Longevity Annuity


If the recent recession taught pre-retirees one thing, it’s that a comprehensive, diversified approach to retirement planning is paramount.

Even those who were well prepared with longstanding 401(k) plans or Independent Retirement Accounts (IRAs) found their investments took a hit during the economic downturn.

Some people have considered additional products such as annuities to help bolster their anticipated income streams in retirement, and now, a new rule by the Treasury is making it possible to convert some of a 401(k) (or other employer-sponsored retirement plan) or IRA into a new longevity annuity.

A longevity annuity is a product that allows individuals to convert a lump sum of money into a stream of income in retirement. But the payments don’t start until a date in the future.

The Treasury finalized the new rule allowing people to convert their retirement plans into longevity annuities in July. While there are some companies currently offering longevity annuities, it’s anticipated that they will begin to market products specifically suited for the new regulations in September, following the finalization of the rule in July.

Here are 5 things you need to know about the new longevity annuity:

1. The conversion amount is capped

Under the Treasury rule, 401(k) or IRA holders can use the lesser or 25% of their account balance, or $125,000, toward a longevity annuity and still be compliant with minimum distribution requirements that kick in at age 70.5.

The total amount will further be impacted by adjustments for inflation in increments of $10,000.

2. The rule allows for a “return of premium” death benefit

Under the Treasury rule, new annuity plans can provide that if purchasing retirees die before (or after) the age when the annuity begins, the premiums they paid but have not yet received as annuity payments, will be returned to their accounts. (Ask your provider about whether this benefit is available.)

3. Payouts must begin by age 85 and are fixed

The longer you wait to receive payments, the greater the payments will be.

4. Spouses with separate retirement accounts can apply separately

However, the limit applies across accounts for a single individual.

5. Rising interest rates may make the new option more appealing

“When interest rates eventually rise, and as longevity annuity pricing becomes more competitive, the payout rates for longevity annuities will likely rise as well… and the new Treasury Regulations do at least open the door to longevity annuities inside of retirement accounts if they eventually become more compelling,” says Michael Kitces, partner and director of research for Columbia, Maryland-based Pinnacle Advisory Group and publisher of The Kitces Report.

Does the longevity annuity option make sense for you?

The older you are when you begin receiving payouts, the larger those payouts will be, based on the way today’s longevity annuities are structured. However, at current interest rates, which are historically low, those planning for retirement soon may opt for other strategies. As rates rise, though, the option becomes more appealing.

“Notwithstanding the not-terribly-compelling implied returns that longevity annuities provide in today’s marketplace, the potential remains for longevity annuities to become an increasingly significant part of the retirement income puzzle,” Kitces say. “[This is especially true] if/when/as interest rates rise, boosting future payouts, and/or more companies enter the marketplace,”

More companies offering longevity annuities will allow for more competitive pricing, he says, noting that fewer than 1% of annuities purchases today are of the longevity type.

Learn more about annuities or talk today with a retirement advisor to assess whether or not a longevity annuity makes sense for you.

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