The Treasury Department recently proposed rules that would encourage individuals approaching retirement to use a new type of planning tool–longevity insurance–to fund increasingly longer retirements. These proposed rules recognize that traditional products are insufficient when your clients are living well into their 80s and 90s, and offer tax incentives to motivate the workforce to defer a portion of their savings until they reach old age.
Using longevity insurance, a type of annuity that defers payouts for an extended period (e.g. 20 years), allows retirees to bypass the typical minimum distribution requirements in certain circumstances. By offering this benefit, the government is recognizing that the days of relying solely on pensions and traditional 401(k)'s to fund retirement are over, and that it's time for retirees to begin planning to enjoy significantly longer lives.
Longevity Insurance Basics
Longevity insurance is purchased before retirement, but the benefits don't begin until the client reaches old age–typically between 80 and 85. The client purchases the annuity at or around retirement age for a lump sum and can choose the date when payouts will begin.
The Treasury Department's proposal encourages retirees to purchase longevity insurance using 401(k) or IRA funds. The proposal would exempt the retiree from minimum distribution requirements typically required of retirement accounts once a person reaches age seventy and one half, as long as the annuity costs less than 25 percent of the account balance, or $100,000, whichever is less.
Deferred annuities are also typically much less expensive than traditional annuities. For example, according to the president's Council of Economic Advisors, it would cost a 65-year-old man $277,500 to purchase a traditional annuity that would begin payments of $20,000 per year immediately, it would cost only $35,200 if the payments were deferred for 20 years.
The cost also decreases when the client purchases the product earlier in life, according to MetLife, a primary provider of longevity insurance. At 85, your client can begin receiving payouts of $50,810 per year if he invests $50,000 at age 55, but the same initial investment provides annual payouts of $28,600 if he waits until he is 65 to invest. Payouts for women are slightly lower because of their higher life expectancies.
This type of advance planning allows your client to enjoy retirement (and their retirement portfolios) with the knowledge that they have another source of income that will kick in once their traditional funds have dried up.
