For More Certainty in Your Retirement Portfolio, Consider Annuities

Investors may worry they’ll die unexpectedly after relinquishing that pile of cash to an insurer, leaving their heirs with nothing. But most people buy features that guarantee heirs will get something — at least for a certain period — even if the annuity holder dies earlier than expected. Payouts will be slightly lower as a result.

Financial experts don’t suggest putting all your retirement money into a paycheck annuity anyway — usually just enough to cover your basic expenses that aren’t already covered by Social Security and pensions.

This can alleviate some of the stress retirees experience with market swings and don’t want to worry as much about adjusting their spending if and when that happens.

And higher interest rates have helped generate more attractive payouts: A 65-year-old male who puts $100,000 in a SPIA would receive $7,000 in annual income, which is about 20 percent higher than $5,790 in March 2021, according to Blueprint Income.

The reason insurers can offer payout rates that exceed what you may earn, say, in the bond market is because of a simple but morbid fact: Some people die earlier than expected. Put simply, a paycheck annuity is returning a portion of your principal, interest (now helped by higher rates) and that little something extra called mortality credits — or money that was never paid out to people who died earlier than expected, which is distributed to those who live longer.

Another variation on these products is the deferred income annuity, sometimes called longevity insurance. This operates the same way, except instead of receiving the paycheck immediately, you get it later, sometimes much later in life, say 80 or 85. That’s why they tend to be lower cost — given the odds, not everyone collects. That’s also why fewer people are willing to buy them.

David Blanchett, head of retirement research at PGIM, the asset management firm part of Prudential Financial, said he believed that every American should have enough guaranteed lifetime income to cover their essential expenses. “It’s hard to know what you can spend — you don’t know how long you are going to live or what your expenses will be.”

But with at least a portion of your necessities covered, “it changes the way you will perceive the remainder of your wealth.”