Longevity Annuities: One Way to Insure Your Worst Fears Don’t Come True

What is it that you fear most about retirement? Do you worry about running out of money? Are you concerned that you might need long term care and won’t be able to afford the costs and that you will become a burden on your family?

If you answered yes to either or both of those questions, you are not alone. These are the most common retirement fears.

longevity annuity

The good news is that there is something fairly straightforward that you can do to help alleviate these very real anxieties. Longevity annuities, also known as old age annuities, longevity insurance, qualified longevity annuity contracts (QLAC), deferred lifetime annuities and even other names are a compelling way to plan a long life in retirement.

Somewhat due to unsavory sales tactics, annuities have developed a bad rap. However, longevity annuities can be a powerful way to hedge against “longevity risk,” or the possibility of outliving one’s savings or needing to fund long term care.

What Are Longevity Annuities? How Are They Used for Retirement Planning

A longevity annuity is a contract between you and an insurance company. You pay money to an insurer today. In exchange, you receive a guaranteed income stream for life beginning at a pre-determined future date – the date when you think you might run out of money or require additional funds to cover long term care.

The income stream you receive will be based on the premium you deposited, your age, life expectancy and the date/timeframe in which the income will be paid. Unlike with variable annuities, market fluctuations won’t impact the income payments you receive with a longevity annuity.

A Longevity Annuity Is Insurance, Not an Investment

There are as many different ways to allocate your assets and plan retirement as there are people.

Annuities are unlikely to be the best way to “invest” your money. So, they may not be the right product for people who want to grow wealth or maximize returns.

However, for people whose primary concerns are around security and maintaining adequate income, then income insurance in the form of an annuity may be the right answer. Annuities are an insurance product. They guarantee income payments in the same way that fire insurance guarantees the values of your home.

Longevity Annuity Case Study: Guaranteeing Income for a Long Life

Feeling a little confused about longevity annuities? How about a simple example?

Meet Jim. Jim and his wife are both 55 years old. They both intend to retire from work at age 67 and start Social Security that same year. They hope to have an inflation adjusted $100,000 to spend each year for as long as they live – no matter how long that turns out to be.

So, how much do they really need in savings? It is actually impossible to know without a magic eight ball to reveal how long they will live (never mind figuring out rates of return, inflation and surprise expenses).

However, if Jim were to buy a longevity annuity, he could simplify retirement planning and ensure his family’s financial stability for as long as necessary.

Jim first needs to figure out how much guaranteed income his family has. He is planning on $48,000/year from Social Security which means he needs to draw an additional $52,000 annually from savings. Jim also guesses that he and his wife will live until at least 80.

So, if Jim needs to draw $52,000 from savings from age 67 until age 80, he needs at least $676,000 in savings to get him to age 80. But, what about after 80? Both Jim and his wife have good genes!

Well, Jim could make sure that he has simply saved enough to last another 50-20 years (a huge swing in value). Or, he and his wife could eliminate the guesswork and purchase longevity annuities to start payments at age 80 to continue as long as they live.

Right now, it would cost less than $230,000 to guarantee Jim and his wife around $4,300 in monthly inflation-protected income ($52,000 annually) starting at age 80. And, this income is guaranteed to continue whether Jim and/or his wife live another two years or 20 years and it includes 5% inflation protection.

The longevity annuity makes Jim’s retirement planning much more predictable and secure. He knows he needs $676,000 to cover income needs until age 80, and he needs $230,000 to purchase a lifetime annuity to make sure he is secure ever after. There is no guesswork or worry.

This is a fairly simple example. However, it can be easy to generate a more personalized and highly detailed calculation. Use the NewRetirement Retirement Planner to figure out your retirement needs and, as part of your plan, model a deferred lifetime annuity to calculate your own projections.

Longevity Annuity Case Study: Funding Long Term Care

Another way to use a longevity annuity for retirement planning is to purchase a deferred longevity annuity to kick in at around the time you might need long term care. Therefore, if you require long term care, you have the income to fund it. If you don’t require long term care, then the income can be spent or saved as warranted.

Longevity Annuity Benefits

Here are a few of the many benefits of longevity annuities.

Peace of mind for the biggest retirement worries

Worry about running out of money is the number one fear for retirees. Longevity annuities can allay those concerns.

Another big concern is around being able to fund a long term care need. Longevity annuities are another way to make sure you plan to have money for this unknowable expense. Best of all, if you don’t require long term care, you gain an extra source of income to use however you like.

Your money grows

As with any deferred annuity, the money in your longevity annuity grows until you begin receiving payout funds from it. The later you choose to begin receiving payments, the larger your monthly payments will be. Be sure to review the rate of return on your annuity.

Efficient use of assets

“It’s a more efficient way to hedge longevity risk,” says David Blanchett, head of retirement research for Morningstar Investment Management.

For a typical retiree, allocating 10% to 15% of retirement savings into a longevity annuity provides roughly the same spending benefits as putting 60% or more wealth toward an immediate annuity, according to a paper published in the Financial Analysis Journal by Jason S. Scott, retirement research director for Financial Engines of Palo Alto, Calif.

Spousal protection

Longevity annuities can be purchased to cover both you and your spouse. This means that if you die before they do, they will continue to receive the annuity income.

Can purchase using qualified funds

A qualified longevity annuity contract (QLAC) lets you purchase the annuity with qualified funds – retaining your tax advantages.

NOTE: Under current rules, an individual can spend only $200,000 of their retirement savings account or IRA to buy a QLAC via a single premium.

Inflation protection

Most annuities can be purchased with inflation protection. This means that your income amount is guaranteed to grow at a specified inflation rate. Inflation protection makes the annuity more expensive, but it can be a worthwhile investment.

Ability to guarantee return of principle

There are many different kinds of riders that can be added to an annuity contract. Some of those riders involve guaranteeing that you will get a certain amount of money back from the annuity, no matter how long you life. You can guarantee a return of how much you invest (return of principle). Or, you can guarantee payments for a certain number of years.

Not required to take RMDs (This is BIG):

In the past, a retiree who wanted to buy a longevity annuity using qualified retirement savings still had to take required minimum distributions (RMD) based on the cost of the annuity.

For example, under the old rule, if you wanted to pay $100,000 to purchase a longevity annuity, you would have to take an RMD from the rest of your savings based on this amount. This means you would be required to take money out of your account to cover RMDs on an asset that wouldn’t pay a cent until you hit at least 80 years old.

Taking this into account, the Treasury in 2012 proposed a rule detailing what it referred to as qualified longevity annuity contracts (QLACs). With QLACs, retirees would not be required to pay RMDs on a portion of their savings if they bought a longevity annuity.

In 2022, the SECURE Act determined that retirees would be able to avoid paying RMDs if the cost of their longevity annuity is no more than $200,000 of an individual’s combined qualified retirement savings

“It [the rules] makes them more palatable for Americans by removing the barriers some people have when it comes to saving with an annuity for retirement,” says Blanchett. “Longevity annuities fill a valuable niche for retirees.

Longevity Annuity Downsides

And, here are a few of the longevity annuity downsides:

Opportunity costs

By tying up funds in an annuity, investors may miss out on potential higher returns from other investments. This can be a concern, especially during periods of strong market performance.

High fees and expenses

Some annuities come with relatively high fees, commissions, and administrative costs.


Annuities can be complex financial products with different features and options, making them harder to understand for some people.

Potential to reduce inheritance

One possible downside of longevity annuities is that the income doesn’t transfer to your heirs if you die early in the contract. However, this can be overcome by purchasing an optional death benefit rider to ensure that your named beneficiaries receive a portion of your initial investment that hasn’t yet been paid out in benefits.

Lack of control

The flip side to being able to guarantee income is that you lose control over the money in the short term. Money tied up in an annuity is not available if something else comes up.

Need to trust your insurer

You need to be sure that you are purchasing a QLAC from a company you trust. Look at ratings from A.M. Best, Fitch, Kroll Bond Rating Agency (KBRA), Moody’s and Standard & Poor’s to be sure you are dealing with a highly reputable company.

Potential surrender charges

Some annuities come with surrender charges that can be significant if the contract is terminated early.

Inflation risk

When you purchase an annuity, you are buying a fixed amount of income. But, the value of that income will fall as inflation rises.

Luckily, annuities can be purchased with inflation protection. This means that you pay extra up front to guarantee that your income will rise at a certain percentage that is hopefully in line with the inflation rate.

Want a Longevity Annuity Quote? Use a Longevity Annuity Calculator

Don’t trust this list of longevity pros and cons. It would be best to investigate whether or not a longevity annuity would be a good or bad idea in your particular situation.

Model a Lifetime Annuity in the NewRetirement Planner: You can use the stand alone lifetime annuity calculator to get annuity estimates. You can also get estimates within the context of your retirement plan, using the NewRetirement Planner. This is probably the best way to visualize the impact of a longevity annuity on your future. In the Planner you can specify from which account to withdraw funds for the annuity and then immediately see the impact on your out of money age, cash flow and more.

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Do it yourself retirement planning: easy, comprehensive, reliable

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Take financial wellness into your own hands and do it yourself retirement planning: easy, comprehensive, reliable.

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