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8 ways to hedge a longevity bet

By Jennie L. Phipps · Bankrate.com
Monday, April 14, 2014
Posted: 3 pm ET

How long will you live? It's a retirement planning question none of us can answer, but not knowing the answer is a serious retirement risk factor.

Dave Littell, retirement income program director at The American College, has been studying ways to mitigate longevity risk given that the average life expectancy at age 65, according to Social Security, is 84 for men and 86 for women. He says the odds of living past age 90 are 1 in 4, while 1 in 10 people will live past 95.

Here are some of his best suggestions for creating inflation-adjusted retirement income that will offset the risk that you'll live longer than your money will last.

Delay taking Social Security. When you do this, Littell says you are in effect buying an inflation-adjusted annuity. At an 8 percent per year increase in value from full retirement age to age 70 along with inflation adjustments for as long as you or your surviving spouse live, "Social Security is very well priced," he says.

Choose the annuity from a pension plan. If you're lucky enough to expect an old-fashioned defined benefit pension, take the annuity -- not the lump. Littell says that the steady stream of income -- although often not inflation-adjusted -- is almost certainly cheaper than what you'd pay if you bought a commercial annuity.

Buy a deferred income annuity. "You can buy them at any age and turn the income on at any age," Littell says. "We're seeing people buying these in their 50s and turning them on in their 60s, but if you buy one at 60 and turn the income on at 80, then you're buying protection for those last years." With most of these policies, you have to pick a date to turn on the income when you buy the policy, but you get a one-time opportunity to change that date. Buying a policy without a death benefit is the cheapest, but most people prefer a death benefit, Littell says.

Buy an index annuity with an income rider. Littell says these are similar to a deferred income annuity, but you can be more flexible about when you turn the income on. These can be purchased for a joint life -- usually husband and wife -- and they include a death benefit, but that benefit shrinks and ultimately disappears over time. "If you really don't know when you'll need the income, an index annuity with an income rider could be good for you," Littell says.

Ladder annuities. The advantage is to buy them at different points during retirement, as interest rates change. Plus, the older you get, the higher the return. Littell says buying an annuity in your 80s can be a way to pay for long-term care at an age when you are likely to need it most. "It makes people feel safer about spending their other money," he says.

Create a Roth IRA as a contingency fund. "If you don't need it, it's a tax-efficient way to leave money to your heirs," Littell says.

Buy rental property. Despite ups and downs in the real estate market, good properties produce reliable income.

Take out a reverse mortgage. If you have substantial equity in your home and you handle this transaction smartly, a reverse mortgage can provide an emergency fund or steady income.

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