EBRI Analyzes Retirement Income Adequacy of Annuities

The difference between immediate annuities and longevity annuities is that longevity annuities delay payments until the retiree hits an advanced age, instead of generating income immediately. 

The EBRI analysis also shows that a key factor in planning for a high level of retirement income adequacy (90%) is whether the costs of long-term care are included in the calculations or not. If they are, no more than 80% − 90% of a retiree’s assets should be converted to an immediate annuity, with the balance reserved to cover long-term care costs. If a longevity annuity is used, retirement wealth should be split between the annuity and equity (stock) investments to ensure long-term care costs are covered. 

Specifically, the report analyzes how immediate and longevity annuities can affect probable income adequacy in retirement by taking into account long-term health care expenditures. 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 three different types of risk: 

• Investment income (how much money retirement wealth is likely to generate in retirement); 
• Longevity (how long the retiree expects to live in retirement); and 
• Long-term care (how much is needed to cover nursing home or home health care in retirement).