Longevity Insurance???

[nun]

I guess there are a lot of teachers in this forum? Isn't that how you get access to TIAA funds? So for those who don't have that access, like me, I think the difference between just putting the money aside yourself or buying this longevity insurance might just revolve around the Treasury dept. ruling that I discussed in a previous post.

Many public employees, university workers and researchers have access to TIAA retirement products.

TIAA traditional is just a guaranteed income product. Because of TIAA's insurance background and very conservative approach to investing it's always been one of the core investments - it's now supplemented with the usual range of mutual funds and target date funds. I've put money into it over 25 years and it's about 10% of my portfolio. You can buy similar things from lots of insurance companies. IMHO the growing popularity of longevity insurance highlights the errors in conventional AA advice over recent decades. If income products had been part of people's AA right from the start they wouldn't be worried about running out of money in retirement. If you have SS and some guaranteed supplement like an annuity you don't have to worry about running out of money. The problem I have with true longevity insurance is you don't get any income until the start date of the contract. Say that's 85, what happens if you run out of money at 80?

 

[haha]

Naturally because of the long deferral, the payments are quite large in relation to the premium paid. I find them very attractive and a good hedge against inflation.
Bruce

If this is a hedge against inflation, which using a normal definition of hedge it cannot be, might not a US treasury zero coupon bond to mature on the same date that your pyments would begin be as good or better?

Ha

 

[rescueme]

IThe ability to buy this product with 401K/IRA assets and then have it reduce your IRA balance when calculating minimum distributions is a BIG deal for some of us...depends on how much you have in your IRA of course.

True. While removal of a "slice" of money from our IRA's which is no longer subject to investment risk, we also looked at factors such as you noted, as related to future "excess RMD's" - that is withdrawls required by law, not necessarily to meet current income needs.

If one was to consider a longevity product, they also need to consider the non-direct financial considerations in their decision.

 

[Gill]

If this is a hedge against inflation, which using a normal definition of hedge it cannot be, might not a US treasury zero coupon bond to mature on the same date that your pyments would begin be as good or better?

Ha

As I see it, if I'm 70 today and, because of the longevity insurance, my income will jump to $135,000 at age 85, that is certainly some protection in the erosion of spending power of my current income. A zero coupon bond purchased today would do nothing but guarantee a lousy return on those funds for the next 15 years.
Bruce

 

[BobbinChina]

Rescueme, Thanks so much for addressing my point.

Now I'm wondering if you've written something on this subject.

You said "we also looked at factors such as you noted, as related to future "excess RMD's".

So who is WE? and is there some study I could read? or is this the imperial WE? I'd love to find more on this subject as the insurance agents aren't going to be as knowledgeable I imagine.

 

[samclem]

Hi,
I'm new to this forum but I am 65 and seriously considering buying a longevity insurance annuity as my family has the annoying habit of long life
I skimmed what you had in this thread and I don't see any mention of what I consider a HUGE change that affects this decision. Seems the treasury dept. is either already or in process of changing rules so we can buy the deferred annuity out of our 401K plans and thus drop the 401K balance.

Here's a link to the recent Bogleheads discussion on this rule change.

Thanks for posting about this, I hadn't heard about it. That could reduce the cost of these products (by reducing the account balances used to calculate the RMDs, thereby reducing the RMD and the potential bump into a higher bracket.) I'd need to know if any solid companies are offering inflation-linked longevity insurance before I'd buy a policy.

 

[samclem]

If this is a hedge against inflation, which using a normal definition of hedge it cannot be, might not a US treasury zero coupon bond to mature on the same date that your pyments would begin be as good or better?

But buying the insurance should be less expensive than buying the bond, due to the mortality issue. In the case of the insurance, the survivors get to split up the contributions and growth of those who didn't live long enough to collect. In addition, with the bond ladder idea you still have to guess how long you'll live when you set things up. With the longevity insurance (or deferred annuity) the checks keep coming as long as you are alive.

 

[BobbinChina]

Here's a link to the recent Bogleheads discussion on this rule change.

Thanks for posting about this, I hadn't heard about it. That could reduce the cost of these products (by reducing the account balances used to calculate the RMDs, thereby reducing the RMD and the potential bump into a higher bracket.) I'd need to know if any solid companies are offering inflation-linked longevity insurance before I'd buy a policy.

I checked the Bogleheads link and unfortunately it points to the same NY Times article where I got my info...circular. I'd love to find something more definitive from Treasury if anyone knows that reference. The article is vague about when it goes into effect. And I'm trying to find solid insurance companies now who offer it. MetLife is about I've come up with so far.

 

[rescueme]

Now I'm wondering if you've written something on this subject.

I've written much on the subject of SPIA's for more than a few years, since DW/I (the "we") have had one since mid-2007. You can do a search on the subject (or my user name) to scan several years of discussion.

I retired in early 2007, but we had been investigating the "product" for about two years before my actual retirement.

Since I'll only speak of a product that I/we actually have (rather than just give my opinion), I'll just add that an SPIA (and only an SPIA) does not have a "salesman". Yes, you do have a licensed agent that handles the paperwork (in our case, through Fidelity), but the costs are re-captured by the insurance company based upon the spread of what they can make by investing your premium, minus what they pay you every year.

 

[Independent]

I checked the Bogleheads link and unfortunately it points to the same NY Times article where I got my info...circular. I'd love to find something more definitive from Treasury if anyone knows that reference. The article is vague about when it goes into effect. And I'm trying to find solid insurance companies now who offer it. MetLife is about I've come up with so far.

Is this better?
http://www.iriconferences.org/wp-co...pm_Davis-and-Harman-QLAC-summary-00174334.pdf

 

[haha]

But buying the insurance should be less expensive than buying the bond, due to the mortality issue.

Good point, I was ignoring motatlity effects, which is likely a big part of the payoff here.

In addition, with the bond ladder idea you still have to guess how long you'll live when you set things up. With the longevity insurance (or deferred annuity) the checks keep coming as long as you are alive.

Well, perhaps, but you could pick zeros to mature every 6 months until an advanced age, if you do this when you are already getting up there. My main comment was that this may or may not be a good investment, but it is not an inflation hedge, as it it not linked to inflation. In fact, a big inflation wipes it out. whether you use zeros or this product. An inflation linked one might be excellent, however.

Ha

 

[samclem]

An inflation linked one [longevity policy] might be excellent, however.

I think so, too. The articles about these products ("deferred income annuities") indicate that companies offer these, but I haven't found one yet.

What I'd be interested in: A pooled fund through an insurance company available for purchase by folks who are presently my age. Invested in (and secured directly by) stripped TIPS that mature in the year I turn 85. In that year the insurance company cashes in the stripped TIPS and distributes the proceeds to all surviving members of the pool. They can use the funds to buy an immediate annuity that will provide income for the rest of their lives. I'm 51 now, so approx 1/2 of the "class" will be dead by age 85. If I put $50K into this and it only barely keeps pace with inflation (the insurance company keeps any real growth as their piece of the pie), I can expect to get $100K (because only half us are alive to get a payout) in 2012 buying power when I'm 85.
That will provide approx $1200 per month (2012 dollars) through an immediate annuity for as long as I live. Not a king's ransom, but enough (together with SS and a paid-off house) to keep the groceries coming in. The knowledge that it was in the offing (guaranteed by USG bonds, not a private insurance company) would permit more aggressive spend-down of the rest of the portfolio while I'm young enough to enjoy it.
Also attractive: I don't have to buy the annuity today (with interest rates at record lows). Also a bonus if I can use $50K from my 401K to buy the initial contract--pre-tax money and I don't really care if the later monthly checks are taxable as I'll probably be at zero effective tax rate if these checks are what's keeping me afloat.
Anyway, I'm sure if this could be profitably sold that some companies would already be doing it.

 

[CoolChange]

...An inflation linked one might be excellent, however...

I think so, too. The articles about these products ("deferred income annuities") indicate that companies offer these, but I haven't found one yet....

I also think an inflation linked payout would be a great product but have not looked for one yet. Please share if you find such a product from a strong company and/or structured in such a way that the product could not be wiped out by bankruptcy or other shenanigans.

My thoughts are that such a product should be even more reasonably priced if purchased fairly early (say 30's or 40's) and provide more options for intervening retirement planning similar to pensions and SS.

 

[bmcgonig]

Longevity

I think I read a smart quote somewhere: "Longevity Insurance solves one of the hardest problems in retirement planning: when are we going do die"

I love the idea too. Espc if I can get it with a 401K. This way I always know that my money has to last me to 85.. not 95 or even 105 if technology comes along and makes us all live much longer.

Also to the person that asked about what does an insurance co do if technology make life spans much longer, I read somewhere that they just make more money on life insurance which should pay out less if that is the case.

 

[bmcgonig]

When i was looking into them I didnt see any inflation linked longevity annuities. I reckoned that I had to just had to estimate inflation at 3% (wag I know) and buy twice what I would need in todays dollars. Not great but not terrible.

 

[imoldernu]

Our personal retirement plan... stops at 85. Nine more years. Living beyond that is unlikely, and can't think of anything we'd be interested in doing that would cost more than our SS...
Worst case, enough to buy candles for the cave, and ramen soups.

Life is hard, and then you die!

 

[Khufu]

My main comment was that this may or may not be a good investment, but it is not an inflation hedge, as it it not linked to inflation. In fact, a big inflation wipes it out. whether you use zeros or this product. An inflation linked one might be excellent, however.

Ha

It's true that inflation is the big risk to an annuity. However, inflation-protected annuities are only better if they are priced correctly, but they are not, according to Wade Pfau.

With the characteristics of this case study, what I find supports my earlier intuition that optimal retirement income strategies consist of partial annuitization with SPIAs. More strongly, it consists of mixing stocks with fixed SPIAs. I was surprised that fixed SPIAs perform better than inflation-adjusted SPIAs, but Joseph Tomlinson explains that this is because inflation-adjusted SPIAs are relatively overpriced.

Retirement Researcher Blog: An Efficient Frontier for Retirement Income

So inflation-protected SPIAs have the same problem as TIPS. They should currently be cheap because inflation is low and has been low for almost 30 years. But they are, in fact, not cheap because investors believe (incorrectly, in my opinion) that inflation will be high in the future.

 

[Khufu]

Our personal retirement plan... stops at 85. Nine more years. Living beyond that is unlikely, and can't think of anything we'd be interested in doing that would cost more than our SS...
Worst case, enough to buy candles for the cave, and ramen soups.

Life is hard, and then you die!

Assuming you have average health at age 76 you individually have almost a 50% chance of living past 85. As a couple, the odds of one of you surviving past 85 would be much higher.

 

[obgyn65]

Hello Dino - I have begun to buy deferred annuities this year (as documented in other threads). I am 47 and the payout from the annuities will start in 2027 when I turn 62. The rate is about 12%.

As far as I can understand, it is a deferred annuity where you put a lump sum down in your fifities or sixties and begin to collect a pretty good payout at age 85 (if you live that long). Anyone have any experience with them? Opinions? It seems to be a good way to avoid running out of cash in your later years.

 

[Sun456]

Hello Dino - I have begun to buy deferred annuities this year (as documented in other threads). I am 47 and the payout from the annuities will start in 2027 when I turn 62. The rate is about 12%.

Obgyn65,
What plans did you buy? I am 45 and bought 4 this year that I plan to start taking income from at 65. The companies were Equitrust MarketTwelve Bonus Index w/ Income for Life (expected roll-up of 7.63% with bonus), the Midland National MNL Capstone 14 with Retire X-Cell Rider (expected roll-up of 7.26%), Aviva Income Preferred Bonus with Income Edge Plus (expected roll-up of 7%) and the Prudential X Series w/ HD Lifetime Income (expected roll-up of 5.87%). I caught some of the products on the way down such as the Aviva which had recently reduced. Since I bought Prudential has discontinued that plan, Midland reduced their rate and Aviva reduced their rate again.

I would love to know what you found that has 12%? I had specifically asked for products with 20 yr roll-ups so if yours has 15 yrs max then I wouldn't have seen it but I would still be interested in it.

Thanks!

 

[MasterBlaster]

Does that 12% return partially include a return of your initial principle ?

It does seem too good to be true otherwise.

 

[Gill]

Does that 12% return partially include a return of your initial principle ?

It does seem too good to be true otherwise.

It would have to include principal. My interpretation is that the initial premium is accumulated for 15 years, i.e., from age 47 to age 62 and then annuitized at an annual rate of 12% of the initial principal. It is not really a 12% return, but something less than that depending on the value of the principal at age 62. Is the 12% payout a guarantee or a projection?
Bruce

 

[obgyn65]

Hello - I had a look at a couple of companies, including Hartford, MetLife, and New York Life. The terms of their deferred annuities were broadly similar. The payout in 15 years is about 12%..

I would love to know what you found that has 12%? I had specifically asked for products with 20 yr roll-ups so if yours has 15 yrs max then I wouldn't have seen it but I would still be interested in it.

Thanks!

 

[obgyn65]

No return of principal as far as I know.

Does that 12% return partially include a return of your initial principle ?

It does seem too good to be true otherwise.

 

[obgyn65]

Yes. Guaranteed in writing.

It would have to include principal. My interpretation is that the initial premium is accumulated for 15 years, i.e., from age 47 to age 62 and then annuitized at an annual rate of 12% of the initial principal. It is not really a 12% return, but something less than that depending on the value of the principal at age 62. Is the 12% payout a guarantee or a projection?
Bruce