Financial Education

Longevity annuities exchange an up-front payment for a stream of payments that will begin some years after retirement. For example, the annuity may be purchased when the investor is 65, but only begin to pay benefits when the investor turns 80. Benefits will continue for the remainder of the investor’s life.

Investment annuity payouts per dollar invested are much higher than immediate annuity payments for several reasons:

• The lack of payouts in early years allows for greater compounding benefits on investment returns
• The shorter remaining expected life span after payouts begin allows for each payment to be larger
• Potential annuitants who die before reaching the target age subsidize returns for those who live longer

In the January/February 2008 Financial Analysts Journal, Scott argues that many investors will benefit from an allocation to longevity annuities, and that the optimal bundle depends upon the percentage of total assets the annuitant is willing to allocate to annuities. The greater the proportion annuitized, the earlier payments should start.

For more information, see all articles on: Alternative Assets, Asset Allocation, Investment Returns, Personal Finance, Risk Management

See also:

Lifetime Financial Advice

Strategic Asset Allocation Concerns for Individual Investors

Investment Objectives and Constraints for Insurance Companies