Many Americans approaching retirement are concerned that their savings won’t last the rest of their life. The risk that seniors will outlive their assets has heightened as longevity continues to increase. Couples, both currently age 62, have a 47 percent chance that at least one of them will live to age 90 or older. Life expectancy at age 65 has risen by about 2 years for women and nearly 4 years for men since 1970. Americans interested in guaranteeing that their money will last as long as they do have several options. A new Government Accountability Office (GAO) report outlines three ways to make sure you have income that lasts the rest of your life. Here are your options for securing lifetime income.
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Traditional pensions. Workers who receive traditional pensions can choose to receive their benefits as payments throughout their life. About 32 percent of households had a traditional pension in 2007 with an average pension income of $19,500, according to the IRS. Pension benefits are insured by the federal government up to certain annual limits, even if the former employer goes out of business. However, many workers with traditional pensions elect to take their benefits as a lump sum instead of payments throughout their lifetime. When the lump sum option is selected there is not a guarantee that the money will last the rest of your life.
Annuities. Retirees with a significant amount of savings can use some or all of it to purchase an annuity, a financial product sold by insurance companies that pays out income for life. Only about 6 percent of households owned individual annuities in 2007 and just 3 percent were fixed immediate annuities – products designed only to provide lifetime income, according to the Federal Reserve.
Annuities offering lifetime income generally provide retirees with more income than they would receive from conservative investments, such as bonds, GAO found. For example, a $100,000 annuity purchase in April 2010 might provide $6,480 per year as long as the purchaser or their spouse is alive. That income is 25 percent higher than the $5,200 of income that would be generated by a highly rated $100,000 30-year corporate bond. However, in the case of the bond investment, the principal amount of the bond would still be available in 30 years or to pay for a large unplanned expense. The original value of the annuity would generally not be available to the purchaser again without penalty.
Few annuities provide payments adjusted for inflation, which could mean that retirees will have less purchasing power each year. And annuities generally leave nothing for heirs. Also, many retirees haven’t saved enough to buy an annuity that would replace more than a small fraction of their preretirement income. Some annuities offer options that address some of these concerns in exchange for lower monthly payments or increased costs. For example, some annuities come with limited death benefits in exchange for lower monthly payments or provide some protection against inflation with the caveat of lower initial payments.
Social Security. Social Security is the largest source of retirement income for people age 65 or older. The payouts generally increase each year to keep pace with inflation. About half of retirees begin drawing Social Security benefits the first year they are eligible at age 62. Payouts increase for each year of delayed claiming up until age 70. Social Security provides an average payout of $11,786 annually among those who sign up at age 62. That amount increases to $15,715 for those who sign up at their full retirement age and $19,487 among retirees who wait until age 69 to claim. The cost of buying an equivalent inflation adjusted annuity from an insurer would be about 68 percent more than the total amount of the benefits foregone from age 62 until age 66, according to GAO calculations. Of course, people whose health or care giving responsibilities prevent them from working and those who can’t find jobs may be unable to delay their Social Security start date to get higher benefits.