Protecting your retirement: Is longevity insurance right for you?
Americans are living longer and that's created a big worry among many baby boomers and retirees that they'll outlive their money. Though the average life expectancy for a 65-year-old today is 84 (for men) or 86 (for women,) one out of every four 65-year-olds will live past the age of 90 and one out of 10 will live past age 95, according to the Social Security Administration.
With the possibility of spending two decades or more in retirement, traditional investment strategies -- such as overweighting a retirement portfolio with bonds and other fixed income assets and decreasing exposure to stocks -- may not do much to help make your money last, some financial experts say. Interest rates are near historic lows, while bond yields are abysmal. So-called "safe" investments, including CDs and money market funds, have miniscule returns. So some investors are considering less conventional retirement strategies to make sure they don't deplete their nest eggs.
If you're too conservative with your investments, your money may not last as long as you'll need it, says Barry Gillman, research director at the Brandes Institute. "The answer now is you look to the equity markets where potentially you have much higher returns over the long term, but with equities, you have more risk. There is no doubt about that."
Gillman says longevity insurance is one way to reduce that risk.
Longevity insurance is like an annuity that pays out a guaranteed income, but not until you've reached age 80 or 85. If the stocks in your retirement portfolio start to slump, the longevity insurance will provide a steady income.
"If you put some money up (for longevity insurance) at the time you retire, maybe at 55, 60, 65, but you don't take the income out of the annuity until you're much older, maybe 80, 85, you get a much higher annuity or pension doing it that way than if you just bought an annuity right at the time you retire," Gillman says.
Joel Singer, 51, is considering adding longevity insurance to his retirement portfolio. Singer, a dentist in Fort Lee, N.J., has a 401(k) plan for his staff and for himself, but he worries that he hasn't saved enough money to fund his retirement and future financial goals. "At my age, my understanding is that traditionally people would be more conservative, but I feel that it's necessary to be somewhat aggressive to accumulate a significant amount of money over the next 10 to 15 years."
But there's a risk with longevity insurance, too. It is not an investment, notes Gillman, it's for investment protection. If you don't reach age 80 or 85 -- whatever age the payout is set to begin -- you don't get the money.