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Longevity insurance has worked its way into retirement plans. Does it belong in yours?
MetLife recently launched a qualifying longevity annuity contract, or QLAC, for employer 401(k) s, and a few firms offer individual policies for IRAs.
The contracts are deferred income annuities, tailored for retirement accounts and designed to provide a stream of income later in life. Federal guidelines issued last year changed the way required minimum distributions are calculated when traditional IRA and 401(k) account owners reach 70, paving the way for the products.
Money in a QLAC is removed from the required minimum distribution calculation until the owner turns on the annuity payments, no later than age 85. Owners can contribute up to 25 percent of their retirement accounts, or $125,000, whichever is lower.
They could have obvious appeal for people whose savings are predominantly in their retirement accounts and who don't have funds in a taxable account to purchase an annuity. They could also attract people trying to lower their required distributions for tax purposes, though those retirees might be wealthy enough not to need the insurance.
Deferred income annuities in general provide an insured floor of income not dependent on stock market returns. With them, retirees who overspend from their stock and bond portfolios or suffer weak markets would have some minimum monthly benefit in addition to Social Security as they move into old age.
Another target could be couples planning to replace the first deceased spouse's Social Security income, or they could help with long-term care costs.
Several other insurers will enter the 401(k) market within a year or so, predicts Jack VanDerhei, research director for the Employee Benefit Research Institute.
A recent EBRI study found that adding longevity annuities boosted retirees' success rates substantially compared with a portfolio of stocks and bonds alone, meaning they helped decrease the odds of running out of money, VanDerhei said.
He thinks many retirees could generally put 10 percent to 15 percent of their nest eggs into the products at retirement and end up with a payment stream in old age that helps them maintain their previous spending.
The kicker with these products for 401(k)s is their potential for group pricing and unisex rates. (Women's longer life expectancies mean they typically pay higher rates for these annuities in the individual market, but in employer plans unisex pricing must be used.)
Some insurers offer inflation riders on the income streams once they begin, but they don't offer the protection during the deferral. Over 25 years, their buying power could shrink by half or more, so it's up to consumers to aim for an appropriate monthly payout.
Today's low interest rates and lack of initial competition are two more problems.
"It's very difficult to come away thinking this is the right time to buy these," VanDerhei said. "But once the discount rate gets back to normal, this will be a good risk-management technique."
Financial planner Michael Kitces asserts that even the worst financial markets in history would have outperformed the implied returns on today's longevity annuities.
That's no guarantee of future returns, and advocates for the products say consumers should think of them as insurance, not investments, but the debate is something to keep in mind as you decide whether, or how much, to buy.
A 60-year-old woman who puts $50,000 into a QLAC on the individual market might get $2,184 per month beginning at age 85, according to recent quotes from immediateannuities.com. A man could get $2,804. Those rates are for an annuity with no death benefit, so if the insured dies before age 85, heirs get nothing. In exchange for lower monthly benefits, you can add return-of-premium provisions or period-certain benefits.
In the group 401(k) market, with unisex rates, MetLife estimates a 60-year-old might get $2,457 per month beginning at 85.
That suggests women might lean toward a QLAC inside their 401(k)s, while a man might do better shopping rates from multiple carriers and rolling over the funds to an IRA. Fund firms Vanguard and Fidelity offer annuity-buying platforms for individuals, and some 401(k) plans guide their participants to Hueler Investment Services, which offers another buying platform.
Also, coordinate this decision with your plans for claiming Social Security benefits.
The program's delayed retirement credits — an 8 percent increase each year you delay claiming beyond full retirement age — might provide enough income that you don't need more longevity insurance.
Still think you'll want a QLAC option at work? Make the case with your benefits department. VanDerhei said employers are worried about their liability, despite government encouragement, so it could be a tough sell.
Janet Kidd Stewart writes for the Chicago Tribune.