How to Create a Pension (With a Few Catches)

Americans with pension envy increasingly are turning to a relatively new breed of annuity, known as “longevity” insurance, to restore some financial security to what are supposed to be their golden years.

With such an annuity, would-be retirees can use a small piece of their portfolio to purchase a relatively large income. In return, investors must be willing to defer that income—typically, for several years—and give up access to at least some of their money. What’s more, as with many fixed annuities, holders could end up sacrificing higher returns that might be available from the stock market.

Politicians and economists have proposed using these policies to help prevent workers from running out of money during retirement. In February, the Treasury Department issued a proposal that would make it easier for people to buy them in their 401(k) and individual retirement accounts.

In recent months, the concept has started to catch on, particularly with baby boomers seeking to boost retirement income in an era of low interest rates. In February, New York Life Insurance Co. announced that sales of its new “deferred income annuity” surpassed $230 million within six months of the product’s July debut. That’s 10 times the company’s sales goal for the first six months. The product now accounts for 35% of overall income-annuity sales through the agents of New York Life, the nation’s biggest seller of plain-vanilla income annuities.

Like an immediate income annuity, a longevity policy allows purchasers to convert a lump sum into a pension-like stream of income for life. But while an immediate annuity starts issuing payments almost instantaneously, longevity policies require policyholders to pick an income start date in the future. (Each insurer sets its own parameters, but start dates can range from one to 40 or more years from purchase.)

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