• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
MENUMENU
  • Home
  • About Us
    • Our Philosophy
    • Choosing a Financial Planner
    • Legal and Regulatory
    • Team
    • Careers
    • Awards & Recognition
    • Contact Us
  • Our Services
    • Financial Planning
    • Ongoing Financial Guidance
    • Portfolio Management
  • Financial Planning Basics
    • Continuing Care Retirement Communities (CCRCs)
    • Retirement Planning and Cash Flow
    • Social Security
    • Taxes
    • Insurance & Risk Management
    • Investments
    • 401(k)
    • Real Estate
    • College
    • Liquidity
    • Divorce
    • Estate Planning
    • Sensible Updates
  • Resources
    • Blog
    • Financial Planning for Older Adults
    • Webinars
    • Videos
    • Financial Planning Guidebook
    • Continuing Care Retirement Communities Guidebook
    • Primers
    • Financial Planning Links
    • Client Login
  • Contact Us
Sensible Financial Planning

Sensible Financial Planning

Follow Us

  • Facebook
  • LinkedIn
  • Twitter
Client Login

Call Us Today
781-642-0890

Buying a Longevity Annuity

by
Frank Napolitano
J.D., CFP®, CFA® Charterholder - Senior Financial Advisor

September 29, 2015

In my previous two posts, I compared how a longevity annuity differs from a traditional life annuity (here) and I described a Qualified Longevity Annuity Contract (QLAC), a special type of longevity annuity (here). Now let’s walk through the mechanics of buying a QLAC.

An Example

Larry and Andrea are two healthy, financially-savvy 65 year olds who live in New York. They’ve read the Society of Actuaries Retirement Participant 2000 Table (I told you they were financially savvy) and know that Larry has a 41% chance of living to age 85 (and a 20% chance of living to age 90), and Andrea has a 53% chance of living to age 85 (and a 32% chance of living to age 90). As a couple, there’s a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90. Concerned that they might outlive their assets, they ask their financial advisor for quotes for a $100,000 QLAC. They don’t know who will live longer, so they ask for an annuity with a survivor benefit of 67% (if Larry or Andrea dies first, the survivor will be entitled to 67% of the monthly benefit).

Their financial advisor obtains quotes from several New York insurance companies and provides Larry and Andrea with the following information:

Payout AgeMonthly Payment
75$955
80$1,534
85$2,620

You will notice that the monthly benefit is noticeably higher the longer they wait. Waiting until age 80 increases their monthly payment by 60% (or about 12% per year). Waiting until age 85, on the other hand, increases their payment by a whopping 174%(!). That’s because the likelihood that either Larry or Andrea will be alive at age 75 (97%) is higher than at age 85 (72%), and the insurer only has to make payments if one of them is still alive at the time the payments begin (and then only for as long as either of them is still living).

Larry and Andrea have lots of options when buying a QLAC. For example, they could add a cost of living adjustment. This option would increase the value of their benefit once it starts, either by the annual change in the consumer price index or by a fixed annual percentage. This might be a good option if Larry and Andrea are concerned about losing their purchasing power over time due to inflation. They could also add a “refund” option. With this option, if they died before the accumulated annuity benefits received equal the annuity premiums paid, the insurer will pay the difference to a designated beneficiary.

Importantly, these options cost money. For example, adding a cost of living adjustment decreases their age 85 payout from $2,620 per month to $2,325. The addition of any guarantee, refund or option requires careful consideration.

The Bottom Line

The first thing you should do if you are concerned about outliving your assets is consider delaying Social Security. The higher inflation-adjusted benefit you get from waiting until age 70 is better than anything you can find in the marketplace. After you’ve done this, however, a QLAC like the one described above is a very efficient form of longevity insurance and may deserve a place in your financial plan.

Also see Rick Miller’s comments on QLACs in Market Watch.

More articles by Frank Napolitano Filed Under: Retirement Planning and Cash Flow Tagged With: Annuities

Primary Sidebar

Sign up for our newsletter

Recent Posts

The picture shows a college campus and students because the article is about FAFSA.

The FAFSA Simplification Act and Financial Aid

The FAFSA Simplification Act makes adjustments to the FAFSA. How will it affect your college student and their financial aid?

The picture shows an older couple hiking on a beautiful day to represent retirement and the SECURE Act.

The SECURE Act 2.0 and Retirement

The SECURE Act 2.0 builds on the initial SECURE Act of 2019, changing the retirement planning space, and increasing retirement flexibility.

Categories

  • College Planning
  • Cybersecurity
  • Estate Planning
  • Financial Planning Basics
  • Financial Planning Videos
  • Insurance & Risk Management
  • Investments
  • Retirement Planning and Cash Flow
  • Sensible Updates

Topics

401(k) Annuities bond returns Bonds Charitable Giving College Planning Company Updates Credit Health Disability Insurance diversification Divorce Donor Advised Funds Economy estate planning Federal Reserve Financial Goals Financial IQ financial planning Financial Strategy Forbes.com housing inflation Investments Investment Strategy IRA Legislation Liquidity Long-Term Care Medicare Mortgage Older Adult Living Recommended Books remote work Retirement Choices retirement planning Retirement Savings Risk Management Securities Social Security Social Security benefits Staff News Stock Market Stocks sustainable portfolios taxes

authors

Rick Miller
Sensible Staff
Frank Napolitano
Rick Fine
Josh Trubow
Chris Andrysiak
Marie St. Clare
Laura Williams
Gyb Spilsbury
Chuck Luce
Aimee Plouffe Polley

Footer

Services

  • Financial Planning
  • Financial Guidance
  • Portfolio Management

About Us

  • Our Philosophy
  • Team

Resources

  • Blog
  • Financial Planning Guidebook
Sign up for our Newsletter
Awards & Recognition

Follow Us

  • Facebook
  • LinkedIn
  • Twitter

Locations

Massachusetts

203 Crescent Street, Suite 404

Waltham, MA 02453

Phone: (781) 642-0890
Fax: (781) 810-4830

 

California

600 B Street, Suite 300

San Diego, CA 92101

Phone: (619) 573-4131​

Disclaimer

This content reflects the opinions of Sensible Financial®. We may change it at any time without notice. We provide this content for informational purposes only. Although we endeavor to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose or availability with respect to the website or the information, products, services, or related graphics contained on the website for any purpose. We do not intend the information contained in this website as investment advice and we do not recommend that you buy or sell any security. We do not guarantee that our statements, opinions or forecasts will prove to be correct. Past performance does not guarantee future results. You cannot invest directly in any index. If you attempt to mimic the performance of an index, you will incur fees and expenses which will reduce returns. All investing involves risk. You can lose any money you invest. There is no guarantee that any investment plan or strategy will succeed.

More important additional information and full disclaimer.

Copyright © 2023 Sensible Financial · All Rights Are Reserved
Legal Disclosure