longevity annuities

Why would someone have a "difficult problem" of turning this pool of assets into a stream of retirement income?

Elizabeth Richardson

Well, it doesn't seem that difficult to me, and I'm retired. I planned ahead, you see. I knew what my expenses would be, how much I need to cover them, and calculated how much money I'd need to generate that level of income. I guess if you don't do that planning, it might, indeed, be a "difficult" problem.

I thought maybe the problem is the IRA and deferred compensation companies not having the mechanisms in place to deal with these cash outflows. And, frankly, this may be the one area where I still have some uncertainty. The company where my husband has his 457 money has lots of articles about saving, but not one on about when it comes time to start taking distributions.

One of the provisions of the 2001 EGTTRA put flexibility into 457 distributions, where before there had been absolute rigidity. I need to investigate how this company has adapted to these regs, or decide how much to rollover to an IRA.

Elizabeth Richardson

If you don't mind, let us know how your retirement funds are invested and how you generate income. I take it that you do not use an annuity?

-Will

The money I'm using for current income - 3-4 years worth - I have in a Traditional IRA in Vanguard's LifeStrategy Income Fund. The longer term money is invested variously. A good chunk is in Vanguard's LifeStrategy Growth Fund, but the 457 money, which we will tap next, has about 20% in a long-term bond fund, about 35% in TR Prices Equity Income Fund, and then the rest is in mid-cap, small-cap and international funds. These aren't necessarily the best funds, but I compared our return on this money to the Vanguard LS Growth 6/30/2006 - 6/30/2007: Vanguard returned 20% over this period, while the 457 was 19.5%.

I need to keep money in the 457 because we will probably want some of this money before my husband is 59.5. I need to do some figuring about this. I think I will rollover a portion into a Traditional IRA at Vanguard. But Will, it isn't just _how_ the money is invested, but that there _is_ money invested. From earlier posts, you may know that my husband receives a pension. This makes it easier for us, so in that respect, maybe we should think of this as an annuity for a portion of our income (though I never have). Still, it isn't enough for us to live on, so our living below our means for many years means we can live without working now. Social Security will also kick in eventually.

Elizabeth Richardson

and then the

Sorry, if the implication is that I anticipate this kind of return in the future. I absolutely do not, and, in fact, project future returns at somewhere around 7%. I posted this to show the difference in returns of the two pots of money.

Elizabeth Richardson

So it sounds like your investment landscape (including your husband's pension) is fairly complicated, particularly if you consider the possibilty of market downturns. This is not a criticism of your investments, I'm just pointing out that what you have done would not necessarily be considered "easy" by most retirees. You have taken the time to educate yourself and prepare your portfolio, but you should give yourself some credit, I wouldn't call that easy.

-Will

Okay, I finally broke down and skimmed the paper. I also have access to the Metlife product brochures and advisor data sheets on the "longevity annuities", which I read. To be honest, I have never heard of these vehicles until now.

They are essentially a deferred fixed annuity that becomes an immediate annuity at some future date. Metlife actually lists them as "flexible premium deferred paid-up annuities with a longevity income guarantee rider" (whew!). The Longevity annuity has structured payout options for both single and joint annuities. A "period certain" option can also be included but it's not without cost. Earliest income withdrawal age is the later of age 50 or 2 years after contract issuance.

On the surface, the numbers don't look so splendid. According to MetLife, a 45 year old can make a lump sum payment of $50k today, and at age 65 begin taking a guaranteed annual income of $11,446. Given an average life expactancy of age 85, that's about a 5.55% average annual growth. Not bad (it's in the "risk free" range) but I'm personally looking for higher returns (especially in my 40's and 50's). Even if you were one of the very lucky few that made it to age 100, you eeked out barely more than a 6% average annual return.

Using the same assupmtions above, MetLife claims they payout $93,733 annually if the investors waits to age 85 to begin their income stream. Again, for the lucky ones that reach 100, this represents roughly a 7.55% return. MetLife offers an interest premium because mortality tables suggest 50% or more of the population won't live long enough to ever get a dime. They can afford to pay the survivors a little extra, because they are paying them with the deceased income.

All-in-all, if one is overly concerned about longevity risk (suppose their entire family has lived into their 90s) then this might not be so bad an option. For the masses, however, it's no golden goose.

Fidelity Investments has introduced a new series of mutual funds to do exactly that. More specifically, the Fidelity Income Replacement Funds come maturities in the even-numbered-years from 2016 to 2036, and are designed to distribute approximately inflation-adjusted monthly payments until the maturity year. See fidelity.com for more details.

Vanguard has such a product in the works, and is expected to announce it before year's end.

Dave

Serious bummer if you live longer than you plan for, though.

Which is exactly why there are annuities...

I haven't yet figured out exactly who those funds are for.

Unless folks have substantial enough wealth that they can take distributions fairly conservatively, the downsides of outliving their wealth are *huge*. In the generations where more folks had pensions, the pensions protected them from that risk. Folks who are taking charge of their own retirement payouts need to manage planning for the chance that they live long lives.

Back to the original article, those deferred "longevity" annuities in conjunction with one of those fidelity Income replacement funds might just do the trick. Of course, if you add those two pieces together, all you've done is reconstruct an immediate annuity for the most part.

It would be an immediate annuity with an equity component, which is different from the usual immediate annuity.

Dave

Depending on the family, it may be reasonable to include children as a resource at a very old age. My 70yo parents can live on their own, but if my mom/dad lives to say 85 and my dad/mom has died by then, I expect the survivor to live with me. I don't think an old person should live alone. Besides the obvious problem of loneliness and not being able to take care of oneself, such a person becomes an easy target for scams. If my elderly parents live with me, a lot of their expenses -- food, shelter, transportation -- will be borne by me.

The possibility of the children helping their elderly parents depends on the characters of the children but also on how helpful the parents have been to their adult children. I remember reading a WSJ article about retired grandparents too busy pursuing their own interests to ever babysit their grandchildren. That attitude may cost them 10 or 20 years later.