Understanding Longevity Annuities: What Are They?
Longevity annuities, also known by Deferred Income Annuities, are financial products that one purchases for a set amount, and in return, the buyer starts receiving payments at a later, predetermined date. These payments carry on for the rest of your life, providing a steady stream of income in your retirement years.
Benefits of Longevity Annuities in Retirement Planning
Longevity annuities serve as a hedge against longevity risk, the risk of outliving your savings. Some of their key benefits include providing a steady stream of income, protecting against inflation if you choose an inflating indexed annuity, and relieving the stress of having to manage and make decisions about your savings in your later years.
Risks Involved in Investing in Longevity Annuities
Like all investment products, longevity annuities also come with their set of risks. One of the key risks is the loss of liquidity, as once invested, it is difficult to withdraw the funds before the agreed-upon date. Other risks can include credit risk of the insurer, and the opportunity cost of lost potential gains from alternative investments.
How to Incorporate Longevity Annuities into Your Retirement Plan
Start by understanding your projected expenses in retirement and calculate the shortfall that longevity annuities need to cover. Ensure this gap is filled in your later years when the annuity payments start. Keep in mind your risk profile and consult with a financial advisor to balance the annuity with other forms of investments.
Case Studies Illustrating the Use of Longevity Annuities
There have been many instances where retirees have benefited from longevity annuities. For instance, in one case, a 65-year-old retiree invested in a longevity annuity with a 20 year deferment period. When his other savings ran out at 85, his longevity annuity kicked in, comfortably seeing him through his remaining years.
Concluding Thoughts on Longevity Annuities
Longevity annuities can be an essential part of retirement planning, especially for those worried about outliving their savings. However, they need to be integrated wisely into a balanced and diversified portfolio considering the associated risks and individual financial situations. As always, consult with a financial advisor to make the best decision for your circumstances.
