Here’s how much retirement income you can buy for $100,000 today
By Brett Arends
I come with good news for those who are currently retiring, who are retiring soon, and for everyone else who wants a secure income for the rest of their lives.
It’s not amazing news, so don’t break out the champagne just yet, but it’s still good news — a rare thing at the moment.
Life annuities, a kind of do-it-yourself annuity that can give you a guaranteed income until you die, has suddenly become a much, much better deal. They are now paying out a monthly income that is a third higher than comparable annuities purchased just a year ago. After more than a decade in which annuities offered a pretty meager supply, they now offer the best payouts since Lehman Brothers collapsed in 2008.
As you can see from our table, someone who wants to retire early in their mid-50s and is willing to pay a one-time premium of $100,000 can earn a lifetime income of more than $6,000 per year while a year ago he would have received well under $5,000. The percentage increases are smaller but still significant, even at older ages.
(The numbers for men are higher, not because of any particular sexism on the part of the pension industry, but because men tend to die younger and therefore face fewer checks.)
You can thank the turmoil in the bond market, which has pushed up short, intermediate and long-term interest rates this year.
These lifetime annuities are technically referred to as “single premium immediate annuities.” They are products offered by life insurance companies. They’re the closest thing many of us can to a traditional, old-fashioned retirement plan: instead of worrying that our savings will last us the rest of our lives, we transfer our longevity risk to the insurance company. You send the insurance company a big check to start, say $100,000, and in return they agree to send you a small monthly check every month until you die, whether that unfortunate date is 6 months from now or 30 years from now lies. The amount of the monthly check, which is determined at the beginning of the contract, depends on your age and gender.
Those who die soon get a bad deal. The excess money helps pay for those living much longer than expected.
Immediate single premium annuities can be a way to extend your retirement savings as much as possible as long as you’re not worried about leaving money for your heirs. The pooled longevity risk is what makes them so useful.
The reason payout rates have increased so much is because insurance companies invest the upfront premiums in government and investment-grade corporate bonds and use the interest to fund monthly checks. Higher interest rates on bonds can therefore lead to higher annuity rates.
Of course, the downside to this good news is that anyone who bought an annuity last year is left feeling upset that they missed out and also watching their payouts being devalued by ongoing inflation. But since we cannot change the past, we should at least focus on the present (and the future).
Many economists argue that annuities are under-obsessed. “A vast and rich literature” of economic research suggests “that sensible individuals of retirement age should spend a substantial portion of their wealth on lifetime annuities,” write finance professors Mohamad Hassan Abou Daya and Carole Bernard in the Swiss Journal of Economics and Statistics. Economists have been making this argument for 50 years, dubbing it “the pension puzzle.”
There are many possible explanations. When you buy an annuity, you lose control of the lump sum. Many retirees want to leave money for their children and grandchildren, while many pensions (though not all) expire upon death, leaving nothing. And annuities can be vulnerable to inflation.
One of the main problems since the global financial crisis is their desperately low payout rates. Retirees can thank the Federal Reserve, which has pursued policies of financial manipulation to keep short-, medium-, and long-term interest rates low in hopes of stimulating the economy. This has deprived older investors and retirees of the opportunity to earn decent returns from lower-risk investments such as bonds, certificates of deposit and annuities, driving many into stock markets. This whole regime has unfolded dramatically so far this year.
Even today, pensions are still associated with a considerable risk of inflation. Most annuities on the market offer a fixed monthly income with no upward cost of living adjustments. As a result, your purchasing power erodes over time. With consumer inflation currently at over 8% per year, this erosion is happening fairly quickly. You can buy annuities with annual COLAs, which are typically worth 3% a year, sometimes more, but there’s a high price to pay: your initial payouts start out much, much lower.
“The amount you’re going to get on day one is much less with an inflation-adjusted annuity,” said Todd Giesing, associate vice president of research director for annuities at insurance industry association Limra. “I think the problem for many Americans is that they take less now and more later… When you think of people buying lifetime annuities with a single premium, they’re buying income for today.”
Converting at least part of your retirement account into an annuity can be a smart move for new retirees. At least you get more for your money now, which has to be good.
(ENDS) Dow Jones Newswires
Copyright (c) 2022 Dow Jones & Company, Inc.