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Annuities as Dementia Insurance

Here’s an often overlooked reason to use annuities in your retirement portfolio: To prevent yourself from making mistakes in the event that you become cognitively impaired.

“The average person in his or her mid-80s has between mild and moderate dementia,” says Daniel Laibson, a professor of economics at Harvard University. In other words, he adds, “half of those in their eighties are not qualified to make financial decisions.”

The reason annuities can prevent financial mistakes is simple: With an immediate annuity, investors receive a steady check every month. While they can always opt to spend that money on something frivolous, it is difficult–if not impossible–to obtain access to the principal used to purchase the annuity in the first place. As a result, those with annuities are less susceptible to blowing all of their money in a financial fraud or unsuitable investment.

The statistics on dementia rates are stark: According to data Prof. Laibson presented on May 3 at a panel discussion sponsored by BlackRock, dementia affects only 0.8% of Americans between the ages of 60 and 64 and just 1.7% of those between 65 and 69. But the rates double every five years, resulting in a steep increase among those ages 70 and older:

AGE                              % WITH DEMENTIA

70-74                             3.3%

75-79                             6.5%

80-84                             12.8%

85+                                30.1%

Even worse, something Prof. Laibson calls “cognitive impairment without dementia” –a sort of “dementia lite” — affects a large percentage of those over age 70:

AGE                                                  % WITH COGNITIVE IMPAIRMENT WITHOUT DEMENTIA

71-79                                       16.0%

80-89                                       29.2%

90+                                          38.8%

BlackRock sponsors a product that packages stocks, bonds, and annuities in one target date mutual fund. (Target-date funds are very popular among 401(k) plan participants.) As a result, the company has something to gain by pushing annuities.

Still, given the high rates of cognitive impairment in the older population, it’s hard to dispute the logic of Prof. Laibson’s argument in favor of annuities.

Economists like immediate annuities for several other reasons. By providing a guaranteed monthly check for life, they remove the possibility of going broke in old age. Annuities can also make sense for those who worry about losing money in the stock market, but want a higher yield than what is available on bonds and C.D.s.

Still, Americans don’t seem to share in economists’ enthusiasm for the product. Purchase rates of immediate annuities are low, in large part because people don’t want to give up access to their principal. Some are also concerned about insurers’ insolvency.


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    • There are many good reasons why retirees should choose an appropriate annuity. A good one should be able to provide no risk to market deficits but still let the retirees’ engagement in market earnings. Some of the options may even provide the chance for ever increasing gains for life. Feel free to connect with me on this blog

    • Annuities can make sense for some people who do not have enough ‘pensionized’ income. Pensionized income includes Social Security, pensions, and annuity income. As a rule of thumb, retirees should have enough pensionized income to at least cover their basic living expenses. For many adequately funded retirees, this is probably best designed in the area of 50-60% of their retirement income. As opposed to immediate annuities starting at retirement in the 60s, “longevity insurance” annuities starting at age 80 or 85 make a lot of sense for healthy retirees to help fill potential income gaps that can occur later in retirement, such as a spouse dying resulting in loss of some of thier Social Security and pension income, or a decline in portfolio value due to market collapse or bad investment decisions. Bought in time (by age 70) longevity insurance is very cheap compared to buying immediate annuities. One other annuity that should always be considered is the deferral of Social Security benefits unti age 70 for the higher of the two married wage earners. It is by far the cheapest annuity purchase available, and it has a COLA (cost of living adjustment) that is very expenisve to purchase in an immediate annuity. Many more retirees should be deferring their Social Security than what we see today. Life expectancies are increasing and it only reuires living past age 80-82 or os to make deferring Social Security a really smart choice annuity for retirees. Annuities can be good, but placing too much of retiree wealth into annuity income is not a good idea. 25 to maybe 50% max is probably a goo uooer limit for retirees who need pensionized income. Annuities and longevity insurance should not be ignored, but it is still a good idea for many people in retirement to start with 50% to 75% of their assets invested for growth and income. And do not overlook longevity insurance, if you are healthy and not yet in your mid-70s.

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  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.