Income for Life

There are four retirement vehicles that can generate lifetime income: A defined benefit plan, reverse mortgage, Social Security and a lifetime income annuity.

The law of large numbers and changing demographics of life expectancy is having a significant impact on guaranteed lifetime annuities. Annuity manufacturers are touting their alpha with mortality credits and receiving newfound interest among financial advisers to solve the longevity risk in retirement.

There is no other financial product that can guarantee lifetime income except annuities. As an individual the average male lives 86.6 years and the average female lives 88.8 years. The surviving spouse in a marriage averages living to age 93.  87% of the time the surviving spouse is a female. Half of all Americans will live longer than those averages.  If the surviving spouse average is age 93 that’s 31 years from age 62, which is the starting age for many guaranteed lifetime annuities. So the average internal rate of return for lifetime annuities is benchmarked at age 62 for 31 years. Those returns could be somewhere around 3% net of all product expense loads. It could be 4% plus, if those at age 93 live to age 100. How can annuity manufacturers guarantee lifetime income? The answer is mortality credits.

The theory uses the law of large numbers and those who don’t survive the averages are credited to those who did survive the averages. Mortality credits are not correlated to the market returns like those of bonds and their credited interest or stocks and their dividends earnings. They’re based on surviving the odds. If Jeanne Calment owned a guaranteed lifetime annuity, every day past her 79^th birthday was beating the bank, or in this case, the insurance company who issued the policy. That’s 43 years beyond the actuarial mortality projection. Had she owned an annuity, the rate of return would have been staggering. At that time annuity carriers were paying significant returns on the basis of high interest rates.

There are stats to suggest that a lifetime income annuity can generate a positive impact on the financial mindset of retirees, that some call the happy factor.