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Longevity annuities for retirees

By Dr. Don Taylor ·
Wednesday, July 23, 2014
Posted: 10 am ET

Earlier this month, the U.S. Treasury finalized rules concerning longevity annuity purchases in a tax-deferred retirement account such as a 401(k) and a traditional IRA.

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The obstacle, prior to this rule, was the retiree's need to take required minimum distributions, or RMDs, out of the retirement account starting in the year that he or she turns 70 1/2. If a longevity annuity doesn't start making payments until age 80 or 85, then the money isn't available for RMDs.

From the Treasury's July 1, 2014 press release, "Under the final rules, a 401(k) or similar plan, or IRA, may permit plan participants to use up to 25 percent of their account balance or (if less) $125,000 (up from $100,000 in the proposed regulations) to purchase a qualifying longevity annuity without concern about noncompliance with the age 70 1/2 minimum distribution requirements."

2 fears of seniors

One of the key worries of seniors is to not outlive their income in retirement, or longevity risk. Social Security and pension benefits, while not free of risk, are relatively certain in retirement. What's not certain is how to make the retirement nest egg last a lifetime.

Retirees also worry about getting hit by a bus and not getting any return on the longevity annuity, which is actually a deferred annuity investment. There are options available in structuring the deferred annuity that will guarantee the annuitant's beneficiary will get, at a minimum, the return of the monies invested in the annuity contract.

Is a deferred annuity the best way to manage longevity risk? In his blog post entitled "Why the new Qualifying Longevity Annuity Contract (QLAC) regulations don't mean much for retirement income… yet?," Michael Kitces points out that there may be better investment options to meet this need in today's market environment, including strategies that delay when a retiree starts receiving Social Security retirement benefits.

The key takeaway is that retirees who have most of their retirement monies in tax-deferred retirement accounts can now use a portion of that money to purchase a longevity annuity without facing RMDs on the annuity purchase price.

What's your strategy toward managing longevity risk in your retirement portfolio? Does this new rule have you considering a deferred annuity?

For more on the topic read about the pros and cons of annuities.

Follow me on Twitter @drdonsays.

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