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Here is how a lot retirement earnings you should buy as we speak for $100,000


I come bearing good news for those who are recently retired, who are about to retire soon, and for anyone else who wants a secure income for the rest of their life.

It’s not amazing news, so don’t break out the Champagne quite yet, but it is still good news—a rare enough thing right now.

Lifetime annuities, a kind of do-it-yourself pension that can provide you a guaranteed income until the day you die, have suddenly become a much, much better deal. They are now paying out monthly income as much as a third higher than similar annuities bought just a year ago. After more than a decade when annuities offered a pretty meager deal, they are now offering the best payouts since the collapse of Lehman Brothers in 2008.

As you can see from our table, someone planning to retire early, in their mid-50s, and willing to pay a one-off premium of $100,000, can lock in a lifetime income of more than $6,000 a year, whereas a year ago they would have got significantly less than $5,000. The percentage rises are less, though still substantial, even at older ages.

(The numbers for men are higher, not because of any particular sexism on the part of the annuities industry, but because men tend to die younger, so they can expect to receive fewer checks.)

You can thank the turmoil in the bond market, which has seen short, medium and long-term interest rates all rocket this year.

These lifetime annuities are technically known as “single premium immediate annuities.” They are products offered by life insurance companies. They are the closest thing many of us can get to a traditional, old-fashioned pension: Instead of worrying about making our savings last for the rest of our life, we transfer our longevity risk to the insurance company. You send the insurance company a big check at the start, let’s say for $100,000, and in return they agree to send you a small monthly check every month until you die, whether that unhappy date is 6 months from now or 30 years. The size of the monthly check, which is fixed at the start of the contract, is based on your age and sex.

Those who die soon get a poor deal. The surplus money helps pay for those who live much longer than expected.

Single premium immediate annuities can be a way of stretching your retirement savings as much as possible, so long as you aren’t worried about leaving money for your heirs. The pooled longevity risk is what makes them so useful.

The reason payout rates are up so much is because insurance companies invest the upfront premiums in Treasury and investment grade company bonds, and use the interest to finance the monthly checks. So higher interest rates on bonds can produce higher annuity rates.

Naturally, this good news comes with the downside that anyone who bought an annuity last year is kicking themselves for missing out, and is furthermore watching their payouts get devalued by persistent inflation. But as we cannot change the past let’s at least focus on the present (and the future).

Many economists argue that annuities are under owned. “A vast and rich literature” of economic research suggests “that rational individuals of retirement age should allocate a substantial portion of their wealth to life 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, referring to it as “the annuity puzzle.”

There are many possible explanations. When you buy an annuity you lose control of the lump sum. Many retirees want to leave money to their children and grandchildren, while many annuities (though not all) expire at death and leave nothing. And annuities can be vulnerable to inflation.

One of the key problems since the global financial crisis has been their desperately low payout rates. Retirees can thank the Federal Reserve, which has pursued a policy of financial manipulation to keep short, intermediate and long-term interest rates low in the hope of stimulating the economy. This has deprived older investors and retirees of the chance to earn decent returns from lower risk investments, such as bonds, certificates of deposit and annuities, driving many into the stock market as a result. This entire regime has dramatically unwound so far this year.

Even today, annuities come with significant inflation risk. Most of the annuities in the market offer fixed monthly income, with no upward adjustment for the cost of living. As a result your purchasing power erodes over time. With consumer inflation currently running north of 8% a year, that erosion is happening pretty quickly. You can buy annuities with annual COLAs, typically worth 3% a year but sometimes more, but there is a hefty price: Your initial payouts start out much, much lower.

“The amount you are going to receive on day one is substantially less” with an inflation-adjusted annuity, says Todd Giesing, an assistant vice president in annuity research director at insurance industry trade association Limra. “I think the problem for many Americans is taking less now and more later…When you think of people who are buying single premium lifetime annuities, they’re buying income for today.”

Converting at least some of your retirement account into an annuity can be a smart move for new retirees. At least now you’re getting more for your money, which has to be a good thing.



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