Lifetime Annuity: Ensuring Employees Have Enough for Retirement

Americans are living longer. Over the next 30 years, the number of people who live to be 100 is expected to quadruple. As a result, more than half of participants with retirement accounts worry they’ll outlive their savings. Inflation, economic uncertainty, and concerns about the future of Social Security are all contributors to this anxiety. One solution is a lifetime annuity, also known as “guaranteed lifetime income” or a retirement annuity.

What Is a Lifetime Annuity?

A lifetime annuity is a financial product purchased through an insurance company or annuity provider. At a predetermined date, the insurer pays out regular payments for the remainder of the recipient’s life. This income is guaranteed, providing retirees with financial security, budgetary control, and peace of mind.

Lifetime annuities are ideal for employees who are about to retire, people with a family history of longevity, and younger employees who want to start building their future financial security.

Annuity payments can be used to:

• Cover basic living expenses
• Supplement Social Security or other retirement income
• Help with medical or emergency costs
• Provide a safety net for unexpected expenses
• Allow for discretionary income to travel or pursue new interests

How Does a Lifetime Annuity Work?

A lifetime annuity is similar to a life insurance policy, only the beneficiary is still living and receives payments for the remainder of their lifetime, not in a single payout.

• Premiums are paid to an insurer, either in a lump sum or over time
• The insurer pays the recipient a guaranteed income for life, starting at a predetermined activation date
• Payments can be monthly, quarterly, or annual
• Annuity payments are calculated based on life expectancy, using statistical models, actuarial tables, and medical records

If the recipient lives longer than their estimated life expectancy, they will still receive their annuity payments. Just like with other insurance products, risk is pooled among the annuity holders. Those who pass away earlier than expected contribute to the overall pool, allowing the insurer to guarantee lifetime payments to those who live longer.

Lifetime Annuities vs. Pensions

Both pension plans and lifetime annuities guarantee lifetime income, but there are key differences:

• Funding: Generally, a pension plan is funded by the employer while a lifetime annuity is purchased by the employee who pays premiums (although employers can also contribute).
• Scheduling: Pension plans are generally paid out after years of service. Annuity payments can be paid immediately or deferred.
• Management: The employer or third-party administrator manages a pension plan, while the insurance company or annuity provider manages a lifetime annuity.
• Risk: Pension plans are federally insured, providing a safety net if the employer faces financial difficulties. Lifetime annuities are not insured and depend on the insurer's financial stability.
• Portability: Pension plans are not portable and are tied to one employer. Lifetime annuities remain with the recipient if they change employers.

Benefits of a Lifetime Annuity in Retirement Planning

The primary benefit of a lifetime annuity is peace of mind. Having a fixed source of income for life helps ensure financial stability. It can also protect recipients in the event of health issues or changes in the economy. Other advantages include:

• Tax Deferrals: Payments begin at a predetermined date, usually upon retirement. During the “accumulation phase,” the recipient’s money grows tax-deferred.
• Protection From Market Volatility: Recipients can choose a fixed annuity that is not tied to the stock market and provides a consistent payment throughout their lifetime.
• Supplemental Income: A lifetime annuity can be used with other sources of retirement income, such as Social Security benefits or a 401(k) plan.
• Survivor Benefits: Annuity recipients can designate a guaranteed period for how long they expect to receive payments. If they die before the period ends, the payments can be passed on to their beneficiaries.
• Delayed Social Security Payments: Since a lifetime annuity can provide income for basic expenses, the recipient can claim Social Security benefits at a later age and receive higher payments.

Types of Lifetime Annuities

Lifetime annuities offer a variety of options and can be customized to fit the employee’s personal situation and retirement planning goals. The types of lifetime annuities include:

• Spousal or Joint Survivor: These provide guaranteed lifetime income for both spouses, even if one spouse dies.
• Immediate: Payments begin shortly after purchase, often within a year.
• Deferred: Payments are delayed until a predetermined future date and are tax-deferred.
• Fixed: Payments are provided at a fixed rate and are not dependent on investment performance.
• Variable: The annuity can have potentially higher returns, but payments can vary with stock market fluctuations.
• IPAs: Inflation-Protected Annuities offer cost-of-living adjustments (COLAs) to offset the impact of rising prices.

What Are the Disadvantages of a Lifetime Annuity?

Lifetime annuities have a number of advantages, but they may not be for everyone. Drawbacks may include:

• Lack of liquidity. Accessing the principal before the annuity payout date can involve fees and penalties.
• Not federally insured. Lifetime annuities carry risk because they are not protected by federal insurance if the insurer cannot make payouts.
• Permanent and irreversible. Once a lifetime annuity is purchased, the decision cannot be undone.

How Employers Can Offer Lifetime Annuities

While an employee can sign up for a lifetime annuity using their own retirement account, many businesses are offering employee-sponsored lifetime annuities in lieu of pension plans. Because employees pay the premiums in part or in full, this can be less costly to the employer. However, employers still have fiduciary responsibility in ensuring the stability of the annuity and its insurer.

Employers generally offer lifetime annuities through two methods:

• Group Contracts: The employer purchases a group annuity on behalf of the employees, who then repays the fund through contributions.
• Defined Retirement Plan Funding. Deferred annuities are purchased using funds from an employee retirement plan, such as a 401(k) or IRA. Employees simply allocate part of their retirement contributions to the annuity fund. Or, if they are eligible for plan distribution, they can roll over their funds to an annuity purchase.

Is a Lifetime Annuity Right for Your Business?

Incorporating lifetime annuities into your employee benefits package can have several advantages. As a retirement benefit, they are popular with both potential hires and current employees. Annuities are relatively low risk to employers and less expensive than traditional pension plans. Perhaps most importantly, they can help employees gain financial security and peace of mind. This can reduce stress, improve productivity, and foster company loyalty.