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Life expectancy in the United States is on the rise — and it creates more financial risk for retirees who have to sustain their nest eggs longer.
According to the Centers for Disease Control and Prevention, today’s average age of 65 lives for another 20 years, about 6 years longer than in 1950.
Older people can take steps to reduce this “longevity risk”, such as working longer and delaying social security.
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According to retirement experts, they also have a free-use type of pension, the longevity pension. This is one of the best financial transactions for seniors who are worried that their money will not last long. However, it has rarely been used so far.
“It’s a condition of longevity,” said Wade Pfau, a professor of retirement income at the American College of Financial Services. “If you live long, you will get the most value for your money that way.”
How they work
Longevity pension is a form of old-age insurance. There are many types, but such pensions are a form of “deferred income pension”.
The basic assumptions are as follows: Retirees give large sums of money to insurance companies today and begin receiving monthly payments years later. Usually between the ages of 75 and 85.
Like any pension, its income flow is guaranteed to last for the rest of your life.
However, deferred payment has its own benefits. Insurance companies pay more per month than other pensions that start early in life. (Pathologically, this is because buyers are more likely to die before income begins, which opens up a pot of money to the few remaining people.)
This is a rough example. Use the quote for a 65-year-old man living in New York who bought a plain pension for a one-time payment of $ 100,000. If this person begins to receive immediate payments, he or she will receive approximately $ 500 a month ($ 6,000 a year) for a lifetime. The same buyer will get about $ 2,800 a month ($ 33,600 a year) by waiting 20 years to start paying.
According to retirement experts, that level of income helps dispel concerns about running out of investment and other savings.
David Blanchett, Head of Retirement Research at Prudential’s Investment Management Division, PGIM, said: “The idea is to create a more finite horizon than planned.
“When you survive to that age, you will be taken care of.”
Certain types (qualified longevity pension contracts, or QLAC) can also reduce the minimum required distribution of retirees from individual severance accounts and 401 (k) plans.
Consumers can purchase QLAC using up to $ 135,000 or 25% of the retirement fund (whichever is less). Those who have $ 500,000 in retirement savings will calculate the required distribution at $ 365,000 instead of the full amount of $ 500,000.
However, despite its benefits, these pensions are not popular among older people.
Deferred income pensions accounted for $ 1.7 billion (0.7%) of total pension revenue of $ 219 billion in 2020, according to the insurance industry group LIMRA. (Because longevity pensions are a subset of deferred income pensions, their share is even smaller. LIMRA does not split this data.)
By comparison, variable annuities accounted for nearly $ 99 billion in last year’s sales.
According to Blanchett, the disagreement is primarily due to the psychological hurdle of giving away large sums of money that would not be profitable if they did not survive for about 20 years.
And they’re not for everyone — retirees who want to maintain control and flexibility over their money may have a hard time handing cash to an insurance company. They may prefer to invest money instead.
“”[Longevity annuities] Economically, it’s potentially the most efficient pension, “Branchette said.
Perhaps the easiest way to integrate a longevity pension into a financial plan is to assess the desired level of guaranteed future monthly income, after considering other sources of income such as social security and pensions, and use the pension to gap. Is to fill in.
(For example, a retiree who needs $ 50,000 a year to live comfortably at the age of 85 and has already received $ 30,000 a year from social security decides on the lump sum required to generate $ 20,000 a year from his pension. Receive an insurance quote for.)
However, according to Tamiko Toland, retirement market director at CANNEX, which provides pension data, this is a tighter financial plan proposal than other pensions. This is because it is difficult to determine how much money you need to live in 20 years. It becomes even more difficult when trying to assess how inflation will affect future living costs.
According to experts, the credit rating of insurance companies is also much more important. In general, the higher the financial rating, the more likely the company will make future payments.
According to Blanchett, it’s wise to get quotes from multiple insurers, and perhaps even accept slightly reduced payments from higher-rated companies.
According to experts, consumers can make it more delicious by purchasing a longevity pension with certain features, but the monthly income for those features is considerable.
For example, consumers can purchase them using refund options. If the buyer dies before the income begins, the beneficiary will receive a refund of the premium. If the buyer dies after the income begins, the beneficiary will receive the premium minus the payment.
Longevity pensions are good for the elderly.But not many people buy them
Source link Longevity pensions are good for the elderly.But not many people buy them