What do people fear most, at least financially, on the eve of retirement? For the distressingly large fraction of Americans who will be chiefly reliant on Social Security, the answer is: How will I make ends meet? But for those lucky or diligent enough to have built sizable savings and investments, the answer is a variation on that theme: How will I avoid outlasting my money?
Even if median life expectancy hasn't changed much in recent years, the older end of the age spectrum is an increasingly busy place. Record numbers of people are living into their 11th decade. Nonagenarians - a perfect word for some of the seemingly ageless 95-year-olds I've met - lately seem a dime a dozen.
So how can someone nearing retirement plan? Ask Matthew Carey, a former Treasury Department policy adviser and co-founder of a Philadelphia start-up, and you'll hear "longevity annuities" - a relatively new deferred-payment financial product designed to insure against the risk you'll skunk the life-expectancy charts.
A federal rule finalized in July gives special status to such annuities, enabling retirees to buy them with some of their tax-deferred savings - IRAs, 401(k)s and the like - by waiving some IRS distribution rules. The goal is to help you plan for a future you may never see without needlessly scrimping in the short run.
If there is a financial word more fraught than annuities, it's hard to find. Complex and confusing, they are sometimes classified as investments and other times as insurance, and in a sense they are a mix of both. Partly because of that confusion, retirees are hard-pressed to decide on annuities' merits.
Just last month, Sen. Elizabeth Warren (D., Mass.) launched an inquiry into what she calls a pattern of costly rewards and incentives offered to annuity brokers and dealers, who have no formal "fiduciary duty" - a legal responsibility to act in the best interests of their clients.
A proposed new Labor Department rule would address that by imposing such a duty on all retirement advisers, just as it's already imposed by the Securities and Exchange Commission on "investment advisers." As Warren made clear, the annuities industry has a lot to clean up.
In a letter to the CEOs of 15 leading annuity writers, including AIG, MetLife, and Lincoln Financial, Warren said her staff had found some providers "offer a vast range of perks - from cruises to international travel to Paris to diamond-encrusted 'NFL Super Bowl-style' rings to cash and stock options - to entice sales of their products."
Warren wants these companies to disclose any perks they provide. And she noted that in 2003, the securities industry banned similar non-cash incentives to brokers and dealers, suggesting it was time for annuities firms to follow suit.
Their responses are due this week, and should begin to clarify whether the insurers themselves or third-party sellers are more to blame for the mess. Whoever is responsible, the incentives create conflicts that, as Warren says, "can place Americans' savings and retirement security at risk." They plainly harm consumers who need help sorting through confusing pitches to get what annuities promise: steady income no matter how long they live.
That's where Carey says his company, Abaris Financial, can help - adding that he and his 10-person team haven't been offered perks like Warren describes and wouldn't accept them. "It's a big industry, and there are lots of bad actors," he says.
Abaris' pitch is that it offers a transparent online marketplace for longevity annuities. Next month, he says, retirees will be able to shop there for IRS-qualified versions using tax-deferred savings. But the site is already running for those with other savings to set aside.
Enter some basics at MyAbaris.com - age, health, how much you've saved, how much you're willing to spend, and when you want income to start - and you'll get quotes from up to seven providers, along with contact information for six others.
MyAbaris defaults to a nest egg of $400,000, as it's aimed at those who have successfully saved. Among all retirees, sadly, median savings are a tenth that size.
For a hypothetical 60-year-old couple willing to devote $50,000 at retirement for an annuity whose payments will start at age 80, Abaris returned quotes ranging from a payment of $827 a month to $952 a month. Each included a 2 percent annual cost-of-living increase - increases that kick in only once payments start. The numbers change depending on the options you choose, such as a death benefit or different inflation factor. Commissions are plainly disclosed, too.
Carey acknowledges that a longevity annuity is not for everyone. But for those with some retirement cash to set aside for the far-off future, it's a hedge against an unknowable risk.