Lifetime Annuities Are Worth A Look If Longevity Is In Your Genes

I recently came across a thread on the bogleheads forum (great source of investing advice) linking to a story about a 107 year old man who had outlived his savings not once, but twice.  It wasn’t because he lived beyond his means, it’s just that he lived so darn long.

Two years ago, friends and supporters raised over $56,000 to help 107-year-old Larry Haubner stay in the assisted-living facility he calls home.  At the time, I suppose it was inconceivable Haubner would live long enough to outlive that first round of fund raising.  Haubner, however, refuses to quit and if there’s one thing all assisted-living facilities have in common, it’s their expense.  Unfortunately, if Mr. Haubner doesn’t come up with some cash soon, he will be forced to go on medicare and move into a nursing home by the end of the year.

Lifetime Annuities To The Rescue

It’s no secret I am often critical of most types of annuity products, especially variable annuities, but there is one kind of annuity I can heartily recommend for many investors:  the lifetime income annuity.  Basically, a lifetime annuity is a contract between you and an insurance company guaranteeing your a pre-determined monthly income for as long as you live in exchange for an upfront lump-sum payment.  If you live for a long time after purchasing an annuity, chances are you will come out ahead financially.  If you die prematurely, the insurance company wins.  But what do you care?  You’re dead!

There are plenty of riders you can purchase that will effect your monthly benefit and upfront costs, but there’s really only one you should concern yourself with.  I would strongly recommend purchasing an inflation-adjusted annuity.  It will lower your monthly income at first, but over the life of the contract you will probably get your money back and then some assuming you survive for a while.

There is little doubt a lifetime annuity can be a powerful retirement-planning tool for new retirees.  Take the Haubner case, for example.  How on Earth could Haubner have guessed he would live to be 107 years old and futhermore, what the cost of medical care would be in 2009 when he retired 40 years ago?  The standard advice regarding safe portfolio withdrawal rates (4%) is only meant to last 30 years.  Thus, unless you are super insanely wealthy and spend no more than 1-2% of your portfolio in any given year, there is a very real chance of you suffering Haubner’s fate.

The solution?  Consider purchasing an income annuity with a portion of your portfolio when you retire.  A good rule of thumb would be to purchase an income stream just large enough to cover your bare-bones needs with inflation protection.  That way, even if you live to 200 or lose all your money somehow, at least you’ll have enough money to get by as long as you live.  Of course, this doesn’t eliminate the risk  of running out of money in the future (medical costs are likely to outpace inflation and thus your annuity).  However, it does significantly reduce your risk.  I bet Haubner wishes he’d bought one.