Does It Make Sense To Delay Annuity Payouts Until Your 80s?

Outliving your money is one of the biggest financial fears people have going into retirement — and with good reason.

From 2010 to 2020, the number of Americans age 85 to 94 grew 12.6 percent and the number of Americans age 95 or older jumped by over 48 percent, according to data from the U.S. Census Bureau. And those numbers are only expected to rise over the next decade as baby boomers age.

But your 401(k) and IRA may not stretch that far and your monthly Social Security benefit might not be sufficient after those other funds run out.

That’s the problem annuities attempt to solve. You can think of them as a self-funded pension, and many people who buy an annuity choose to start receiving income shortly after they retire.

There’s a special kind of annuity designed for the last chapters of your life — one that doesn’t pay out until age 75, 80 or 85. It’s called a longevity annuity, and it’s meant to ensure you against financial hardship, no matter how long you live.

But does it make sense to delay annuity payouts that long? It depends on your situation — and your tolerance for locking away some of your money now in exchange for security later.

What is a longevity annuity?

A longevity annuity is a type of deferred income annuity. That means you pay the insurer a lump sum now, and in return, they promise to start paying you a fixed monthly income at a future date — typically once you turn 75 or 85.

Because you’re waiting decades to receive your payments, the insurance company can invest your money longer. The payoff? Bigger monthly checks down the road compared to what you’d get if you started taking payments earlier.

Here’s an example.

• A 66-year-old female would need to fund a longevity annuity with $10,310 to $14,431 (based on quotes from an online annuity marketplace) in order to generate $500 in monthly income starting at age 85.
• Meanwhile, that same 65-year-old woman would need $73,938 to $89,529 to fund a single-premium immediate annuity that begins making $500 monthly payments right away.

The longer the deferral period, the less money you need to put down today.

The trade-off is obvious: You can’t access that money for 15 to 20 years or more, and if you die before the payments kick in, the insurer keeps the money unless you’ve purchased a special rider at an added cost.

What is a qualified longevity annuity contract?

A qualified longevity annuity contract (QLAC) is a longevity annuity purchased with money from a qualified retirement plan like a traditional IRA or 401(k). This type of annuity comes with a major perk: You can delay required minimum distributions (RMDs) on the money used to fund it.

Normally, the IRS requires you to start taking RMDs at age 73, whether you need the money or not. But with a QLAC, you can exclude up to $210,000 in 2025 from those calculations, provided you meet the rules. That means lower taxable income in your 70s, plus guaranteed income later when other sources might run out.

The rules around QLACs are strict. Payments must start no later than age 85, and there are limits on how much you can contribute. But for high earners with large retirement balances, using a QLAC to shrink RMDs and shift income into their 80s can be a smart tax move.

You might be able to buy a QLAC through your workplace 401(k) plan. If not, you could roll the funds to an IRA to buy a QLAC.

Longevity annuities aren’t a good fit for everyone

Despite the appealing promise of late-in-life income, longevity annuities — like all annuities — come with some drawbacks.

The biggest downside? Less flexibility. Once you fund your contract, your money is locked up. You can’t tap it in an emergency, change your mind or pivot to another strategy. It’s illiquid by design.

It can also be difficult to anticipate your financial needs two decades or more down the road. Do you know how much you’ll spend at age 85? How healthy you’ll be or what inflation will look like? Betting on a product that doesn’t pay out for 20 years assumes a lot of things will stay on track — your health, your expenses, your long-term care situation.

Another drawback is that a death benefit to your heirs isn’t standard with longevity annuities.

You can add one, but it’s going to cost you — and it’ll shrink your monthly payout. Some insurers offer optional riders with features like a return of premium, which refunds the money you put in if you die before payouts begin. If you die after income begins, they get whatever’s left after subtracting the payments you received.

But buying a death benefit rider might not even be worth it. You’re giving up a chunk of future income to guarantee a refund your beneficiaries might not need, especially if you’re passing down other assets.

What to know before buying a longevity annuity

If you’re in the market for a longevity annuity or QLAC, you’re preparing to make a long-term investment, so it’s vital to do your due diligence.

First, make sure the annuity company you’re buying from has a strong credit rating. These annuities are backed by the insurer’s ability to pay, not by the federal government. If the company goes under, you’ll have to work with your state’s guaranty association to get your money back — a long and complicated process.

To avoid that scenario, check ratings from agencies like AM Best, Moody’s and Standard & Poor’s to learn about the insurer’s financial strength and its ability to make payouts for the long haul.

Also, shop around. Payouts can vary significantly from one insurer to another. Get multiple quotes using a rate comparison site like Income Solutions and compare the monthly income offered. Once you start working with an insurance company, don’t be afraid to ask hard questions about fees, optional riders and the fine print.

Does it make sense to delay annuity payouts until your 80s?

Longevity annuities aren’t for everyone and they don’t fit into every retirement plan. So who does this actually work for — and who should look elsewhere?

A longevity annuity might make sense if:

• You’re in good health and come from a family with a history of longevity.
• You want peace of mind knowing you’ll have income no matter how long you live.
• You already have enough to cover early retirement and want a hedge for later.
• You’re looking for a way to reduce and delay RMDs from your IRA or 401(k).
• You’re comfortable locking up funds for 15 years or more.

A longevity annuity might not make sense if:

• You have health issues or a shorter life expectancy.
• You don’t have enough saved to cover early retirement needs.
• You want to leave money to heirs and don’t want to pay extra for a rider.
• You’re looking for growth or inflation protection. (Most longevity annuities are fixed.)

If you’re unsure if a longevity annuity is right for you, a fee-only financial advisor can run the numbers and stress-test your plan.

Bottom line

Longevity annuities solve one very specific problem: the risk of outliving your savings in your 80s, 90s or beyond. For people with enough wealth to cover the early stages of retirement and who want to take advantage of certain tax benefits, they can be a smart tool — especially when used inside a tax-advantaged account as a QLAC. Before you commit your money though, meet with a financial advisor and make sure you understand all of the contract’s terms and conditions.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.