Doing the math on a retirement annuity

Sharon Carson admits she just did something strange. At 49, she wrote a check to an insurance company for a product that won't give her any financial benefit until she's in her 80s. Ms. Carson, a top executive in JPMorgan Chase's retirement business, knows that buying a longevity annuity can pay off. On July 1, the U.S. Treasury pushed more savers to follow in her footsteps. Its new rules allow the annuities, also known as longevity insurance, as an option in millions of Americans' individual retirement accounts and 401(k) retirement plans. The challenge: convincing savers to choose that option. The annuities thrill retirement experts and policymakers who see them as a way to ensure workers don't end up impoverished in old age. Just about everyone else ignores the products, which make up less than 1 percent of all annuity sales. It can be a great deal. With $125,000, a 60-year-old man can buy a policy from New York Life that guarantees an income of almost $45,000 a year starting at age 80. The same $125,000 in a regular retirement account would need to grow at the unlikely rate of 11% a year from age 60 to 80 to provide that income, assuming 4% is withdrawn annually after age 80. Since women live longer than men, their longevity policies are more expensive — and more valuable. Millions of widows in their 80s and 90s end up living on Social Security alone. A 60-year-old woman who puts $125,000 into one of these annuities could get an annual payout of $35,268. For Carson, with no children and a husband “who is not quite as healthy as I am," her longevity benefit is a hedge against long-term-care costs. "I may be on my own later in life," she says. Dollars in longevity policies go farther for those who buy earlier than 60 or start the benefit later than 80. If the insurance becomes common in retirement plans, the cost of policies should fall. To maximize her payout, Carson decided against buying inflation protection and a provision that refunds all the money she put in if she dies early. Indeed, the oft-repeated big "risk" with longevity insurance is that buyers could die before they collect. But that chance is what allows the policies to be so lucrative for the long-lived. Those who die early help pay for those who live into their 90s and later. And even if you die at 75, the guarantee of income at 80 means you can tap the rest of your nest egg earlier without worrying so much about running out of money. Bloomberg.com