EBRI Issue Brief

Retirement Income Adequacy With Immediate and Longevity Annuities

May 18, 2011 36  pages


UPDATING EARLIER EBRI ANALYSIS: This Issue Brief updates with recent information and estimates on retirement and health care expenditures a previous EBRI analysis (from 2006), which quantified how different types of risk (investment income, longevity, and long-term care risk), asset allocation, and percentage of annuitization affect retirement income adequacy.

IMPACT OF IMMEDIATE AND LONGEVITY ANNUITIES ON RETIREMENT INCOME ADEQUACY: This report analyzes how differently immediate and longevity annuities can affect probable income adequacy in retirement by taking into account long-term health care expenditures. Specifically, it attempts to find the optimal level of annuitization and asset allocation that would provide a desired level of confidence that individuals will have sufficient retirement income, based on the three different types of risk: investment income, longevity, and long-term care. Immediate annuities, as the name implies, begin distributions to the owner as soon as they are purchased; longevity annuities delay distributions to a specified later age, to help protect the owner against the risk of outliving his or her assets.


• Annuitization by using either immediate or longevity annuities appears to be more effective for retirees with low income than those with high income to reach a desired level of retirement income adequacy under certain conditions.

• As previous research has shown, adding in retiree health and long-term care costs to the retirement calculation dramatically increases estimated retirement costs—and the initial retirement wealth needed to finance those costs.

• The impact of an immediate annity on retirement income adequacy: Simulation results show that for a male retiring at 65 facing investment and longevity risk, who desires a 90 percent chance of retirement income adequacy with an immediate annuity, could optimally achieve that target by fully annuitizing his initial retirement wealth regardless of different equity allocations in his portfolio. However, if he is assumed to be facing investment, longevity, and long-term care risk, he would need to annuitize 80?90 percent (not 100 percent) of his initial retirement wealth; some portion of his initial retirement wealth should be reserved to finance unexpected long-term care costs.

 • The impact of a longevity annuity on retirement income adequacy: To achieve the same (90 percent) chance of retirement income adequacy with a longevity annuity, simulation results show that when the retiree faces all the three types of risk (investment, longevity, and long-term care risk), he should increase the allocation of his initial retirement wealth to both a longevity annuity and equities in his portfolio, compared with when he faces only investment and longevity risk. The increased allocations to a longevity annuity and equities are to cover the unexpected significant long-term care costs.