Retirement Income You'll Never Outlive

If your family has a history of longevity, outliving your money might top your list of retirement worries. At age 64, Phyllis Chandler is a mere youngster among her relatives: "My father lived to 93, his mother was 98, and I have an uncle who will be 100," says Chandler, who lives in Omaha.

Chandler is retired from her full-time job in early-childhood education and continues to work as a consultant. She plans to delay drawing down her retirement savings for as long as possible, but she also wants to lock in guaranteed income for the future.

So she recently invested a chunk of her retirement savings in longevity insurance, a new type of annuity that will pay her a lifetime income when she gets older. With her house paid for, she hopes that the insurance payouts plus Social Security will be enough to cover her basic living expenses.

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Powerful appeal. If you have enough money to live on during the early years of retirement, you may not need a lifetime paycheck just yet. But when you reach your eighties, lifetime income exerts a powerful appeal. Set aside a lump sum when you retire to buy longevity insurance, and you're assured of a steady paycheck if you live past a certain age, such as 80 or 85.

For example, a 65-year-old man who invested $50,000 in MetLife's Retirement Income Insurance would receive $3,405 per month starting at age 85. That's $40,860 per year, which buys a lot of security.

The reason that insurers can offer so much money is that you're making a huge bet -- that you'll be around at age 85 to collect. To put it bluntly, insurers that offer longevity policies can afford tantalizing payouts because they're certain many policyholders will never collect a dime.

What's more, the basic longevity policy offers no escape hatch to retrieve your money during the 20 years or so you're waiting for benefits to start. And your heirs won't get death benefits if you die before you begin to collect.

Recognizing that many people might balk at these limitations, insurers offer both perks as options. But choosing such additional sweeteners reduces your payout.

For instance, MetLife offers a plan that pays a death benefit equal to the original investment plus 3% per year if you die before payments begin. If a 65-year-old man invested $50,000 in MetLife's policy, he'd get $1,965 per month for life starting at age 85 -- more than $17,000 less each year than he'd get without the death benefit. The payout for a 65-year-old woman would be even less.

The Hartford's basic policy pays about $3,400 a month at age 85 for a 65-year-old man who invests $50,000. Another version of the plan comes with a reduced, $3,000 monthly benefit, but pays out early if the policyowner moves into a nursing home or an assisted-living facility after owning the policy for at least ten years. However, a long-term-care policy would offer more-comprehensive benefits.

Do it yourself. Think of these policies as insurance rather than as investments -- meaning you may never get your money back, especially if you choose the option with the highest payout. "This has to be done very judiciously because it's irrevocable," says Kevin Wells, an adviser with broker Linsco Private Ledger, in Indianapolis.

Or you could skip the insurance and accomplish a similar result by investing $50,000 at age 65. With an average annual return of 4.5% after taxes, you'd be able to accumulate more than $120,000 in 20 years.

At age 85, you could begin spending the money or use it to buy an immediate annuity. An 85-year-old man who invested $120,000 in an immediate annuity would get about $1,600 per month for the rest of his life. That's much less than he'd receive with the longevity policy, but he'd have access to the money for emergencies or to bequeath to his heirs.