Financial Protection Program 3: How to Secure a Guaranteed Lifetime Income

Self-Funded Pension Plans Explained

A Self-funded Pension Plan (sometimes called longevity insurance, or a deferred income annuity) is a financial instrument that guarantees you’ll always have income in retirement, no matter how long you live. Investors typically purchase a longevity annuity as they near retirement age. After paying into the annuity, often in one lump sum, you wait until the payout date, then receive monthly payments.

If you’ve already put away money into a 401(k) or IRA, you can use some of that money–up to 25% for a maximum total of $125,000–to purchase a longevity annuity. In order to avoid a tax penalty, you just have to start collecting payments by no later than age 85.

Benefits and Risks

The benefits of longevity insurance are obvious. They provide security in case you live longer than planned or have unexpected expenses. They’re also a good backup plan in case Social Security is ever changed. In recent years, there have been signs from Washington that means testing or other methods of reducing Social Security payouts could be coming.

Any investment comes with risks, and longevity annuities are no exception. The type of annuity you choose will impact the amount of risk you face. There are two kinds of deferred income annuities–those with a fixed rate of return and those with a variable rate of return.

A fixed rate of return means you get a guaranteed return on your investment. Even if the market takes a dive, you’ll get the same amount in your monthly payments. This is a lower risk option, but your payouts are likely to be lower, too.

With a variable rate of return, the amount of money you receive may change. This can lead to more money in your pocket each month, but it’s also riskier, as it fluctuates with underlying rates.

Other Options

Even with a longevity annuity, it’s important to remember you have other options for retirement savings. A longevity annuity is a great plan if you’re getting close to retirement age and are concerned about running out of money. But if you’re 20 years or more away from retirement, focus on saving money through other means first.

There are plenty of tax-deferred options for retirement savings. If you have set up a solo 401(k) plan, take advantage by putting as much money as possible into it. You can contribute a maximum of $55,000 a year if you are younger than 50, and up to $61,000 if you are over 50.

If you don’t have a 401k, contribute to your IRA. With a traditional IRA, you can set aside money and defer paying taxes until you withdraw. A Roth IRA allows you to set aside money after taxes and pay no tax when you withdraw–provided you wait until you’re 59.5 years old. Both plans have a maximum contribution of $5,500 annually.

Don’t forget, you can also save money with an HSA. These tax-free accounts allow you to set aside money for qualifying medical expenses. As you age, medical bills can really add up, and an HSA can save you a lot of money. Individuals can contribute up to $3,450 and families can contribute $6,900 each year to an HSA.

To find the right plan for your retirement savings, call our customer service or talk with your trusted Personal Benefits Manager for more information.

Click here to schedule an appointment, or call 800-913-0172 to get started.    

To your health and wealth,

Wiley P. Long, III
President - HSA for America

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