AARP is getting into the annuity business, offering a "lifetime income program" to its members through New York Life Insurance Co.
AARP and New York Life say the program will offer a more secure stream of retirement income, providing guaranteed income for life to AARP members between the ages of 50 and 85.
"As traditional sources of retirement income, such as pensions, become less and less available, AARP members -- like all Americans in or near retirement -- are increasingly concerned about how best to address their income need and safeguard their financial security," said Larry C. Renfro, President of AARP Financial.
"Mindful they run the risk of outliving their assets without ongoing income, many AARP members have expressed interest in the potential of annuities to help fill their income gap."
The plans being offered by AARP include so-called "immediate" annuities -- meaning they start paying out as soon as you transfer cash into the plan. This is the opposite of the "deferred" annuities that are often sold to unwitting seniors by scam artists. Deferred annuities may be appropriate for younger persons but not for seniors who are about to retire.
The AARP offering includes "fixed" annuities -- guaranteed to pay a certain amount per year, as opposed to variable annuities whose payments are indexed to, say, the stock market. Consumer activists are often critical of variable annuities if they make up too large a percentage of the retiree's portfolio.
The plans being offered by AARP/New York Life closely mirror a traditional "defined benefit" pension -- they will pay a predetermined amount on a monthly or yearly basis for as long as the annuity holder is alive. Various options are available that make allowances for inflation, surviving spouses, etc. (See "Annuities: Fools Gold or Fiscal Smarts?" for a more complete discussion of annuities.)
Consumers should be certain to check with their tax advisor since annuity proceeds are taxable in most instances and annuity payments could affect the amount one receives from Social Security.
AARP Cites Research
AARP said recent New York Life research documents the growing retirement income need. More than half (58%) of pre-retirees surveyed by New York Life thought it important at or near retirement to supplement the income they will receive from Social Security or pensions by purchasing a product like an income annuity that provides guaranteed retirement income for life.
After a test marketing in the second half of 2006, the AARP Lifetime Income Program is now available to most of AARP's 37 million members, those living in 42 states and the District of Columbia. Additional states will be added soon, AARP said.
These lifetime income annuities provide a stream of guaranteed income payments for life, no matter how long the annuitant lives. The annuitant decides the amount of income they wish to guarantee and purchases an annuity in the amount required to establish that stream of income. The insurer does the rest, delivering a monthly paycheck for the remainder of the annuitant's life. This guarantee is backed by the claims paying ability of New York Life and Annuity Corporation.
The AARP Lifetime Income Program sets a minimum premium of $5,000 to begin a lifetime stream of income, and sets no maximum premium for the plans. Since the single premium is locked in, each income payment an AARP member receives represents a return of premium and interest. Currently, a 65-year old male can expect annual income payments in excess of 7 percent of premium guaranteed for life from a $100,000 Cash Refund annuity.
In other words, a consumer who transfers $100,000 into an AARP annuity could expect to receive about $7,000 per year for the rest of his or her life. While higher returns may be available elsewhere, the annuity guarantees that the consumer will not outlive his or her money.
One drawback to annuities is that if the consumer dies relatively early, he may receive less in retirement payments than was paid in. In such a case, the money is simply lost. It cannot be passed on to heirs.
AARP said it will offer an option that, in such cases, would return the unpaid balance to the consumer's estate. If that option is chosen, the interest payout would be roughly 10% less.
On the other hand, with seniors increasingly living well into their 80s and beyond, a consumer in relatively good health has a fair chance of being paid much more than he or she paid in.
For example, a consumer who retires at age 65 and invests $100,000 in an annuity paying 7% would be $40,000 ahead of the game if she lived until age 85.
According to Brian Duffy, Senior Vice President of New York Life, the company will offer income annuities with various product and service features designed to meet the needs of AARP members.
"Our suite of annuity plans offer guaranteed monthly payments for life, the ability to access extra cash in an emergency, and premium protection features that ensure the total income an annuitant or their beneficiary receives will never be less than the initial premium amount paid," Duffy said.