New Lifetime Annuities Try to Draw In Retirees

Spending down a portfolio in retirement is fraught with financial peril, in part because you don't know how long you will live. But the insurance industry has come up with an intriguing solution: a new breed of annuity that you might buy in your 50s or 60s and thereby lock in a heap of monthly income starting in your 80s.

When it comes to new financial products -- especially insurance products -- I am usually pretty leery. But this is one innovation that looks like a winner.

Coming up short

I often suggest retirees sink maybe a quarter of their nest egg into an immediate-fixed annuity that pays lifetime income. That way, no matter how long you live and no matter what happens to your other savings, you know you will get that annuity check every month.

But these products aren't exactly popular. Individuals plunked just $5.3 billion into immediate-fixed annuities in 2004, a pittance compared with the $53.2 billion that flowed into mutual funds, according to figures from Washington's Investment Company Institute and LIMRA International in Windsor, Conn.

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Why are sales so sluggish? Retirees fear they will purchase an annuity and die soon after, thus losing their entire investment. Indeed, because of this fear, only a minority of buyers opt for a pure life-only annuity.

Instead, the vast majority take a haircut on their monthly income in return for some sort of guarantee. They might, say, purchase a lifetime-income annuity that will make monthly payments for at least 15 years, even if they die earlier.

As I see it, these folks have got it backward. When you buy an immediate annuity, you shouldn't worry about enriching your heirs, should you die earlier than expected.

Rather, with an annuity, the goal is to ensure you will have plenty of money, should you live a surprisingly long time. That's why I am so intrigued by two new products, one from MetLife Inc. and the other from New York Life Insurance Co.

Thinking ahead

Let's start with MetLife's "retirement income insurance," which was launched late last year.

How does the product work? Suppose you are worried about outliving your savings and want to guarantee yourself $1,000 a month for life starting at age 85. With the MetLife product, you could lock in that income by investing $33,800 at age 65.

In theory, this is a great idea. In practice, I think MetLife's product has too many bells and whistles. For instance, it is possible to make a full or partial withdrawal of the annuity's value. In addition, if you die before income begins, your heirs receive your investment plus 3 percent annual interest.

Sound appealing? There is a downside: As with a conventional immediate annuity, all these features come at a price, in the form of lower monthly income.

In fact, you probably could generate fairly similar results by investing the $33,800 in a tax-deferred fixed annuity, letting it grow for 20 years and then converting it into an immediate annuity. Instead, I think the really exciting product will be MetLife's next iteration, which should be launched within the next six months.

This new product will offer pure longevity insurance, promising you monthly income if you live to a certain age, but without all the extras of today's MetLife offering. If your goal is simply to lock in future income, "you will get more bang for your buck" with the new no-frills product, says MetLife Vice President Howard Kurpit.

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New York Life also plans to sell pure longevity insurance. In the meantime, however, it is adding a new wrinkle to its existing immediate annuity. Starting this month, buyers will be able to schedule a one-time increase or decrease in their monthly payments.

You could take advantage of that flexibility by, say, purchasing an annuity that pays $10,000 a year from age 65 to 85, at which point payments leap to $40,000 a year. Keep in mind that, because of inflation, the $40,000 at age 85 might have just twice the spending power of the $10,000 at age 65. Still, knowing you will get that extra income would be hugely comforting, allowing you to spend down your other savings much more aggressively in the next 20 years.

New York Life calculates that this step-up annuity would cost $158,844 for a 65-year-old man and $187,126 for a woman. For the man, this is only $30,402 more than the cost of the same $10,000-a-year annuity without the step-up, while the cost for a woman is just $45,195 more. In other words, if you opt for the step-up and you make it to age 85, it won't take very long to recoup the extra expense.

There is a good reason the step-up annuity seems cheap: In this example, the income increase is scheduled for age 85, which is the life expectancy for a 65-year-old woman and three years beyond the life expectancy for a 65-year-old man. The step-up is insurance against living a long time -- but many buyers will die before they get the payoff.

With the new longevity-insurance products, "you can now spend down a greater portion of your assets, because you don't have to worry about outliving your assets," says Ted Mathas, an executive vice president with New York Life. But, he warns, "if your health isn't good, you shouldn't be buying it."

Source: - 08-14-2005

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