Approximately 10,000 American baby boomers will turn 65 today. And tomorrow. And every day after that until 2030, when all baby boomers will be over the age of 65. This “gray tsunami” is predicted to set new firsts, and that’s not even taking into account their longevity. According to the Society of Actuaries, a married couple who are both age 65 currently run a 50% chance that one of them will live to be 90.

While longevity is on their side, the “longevity threat,” defined as outliving one’s retirement income, is not. Baby boomers started their careers at the dawn of the earliest 401(k) plans. Only a small percentage of those retiring now have old-style defined benefit pensions.

That poses a hazard for maintaining their wealth, which they’ll have to be careful not to consume. According to the Center for Retirement Research at Boston College, retirees who depend on a defined contribution plan, such as a 401(k) or 403(b), are going to spend it down more quickly than previous generations that used pensions.

But the wealth will be depleted more slowly, the center says, if retirees’ money sources come more from things in an “annuity-like form.”

That means advisors trying to help boomers slow that depletion could turn to products like charitable gift annuities, particularly the flexible deferred gift annuity.

How A Flexible Gift Annuity Works
A flexible gift annuity is a form of deferred charitable gift annuity. Here a client makes an irrevocable gift to a charity in exchange for an annuity that begins at least one year from the date of gift. However, instead of deferring the first payment to a specific date, the annuitant is given a decade or more of possible starting payment dates to choose from. The payout rate associated with each possible starting date appears in the gift annuity contract. The longer the annuitant defers receiving payments, the greater the annuity will be when payments begin. Once the election is made, the annuity rate is fixed for the life of the gift. The table above shows the range of rates available to a 65-year-old establishing a flexible gift annuity with the minimum one-year deferral.

A client using the flexible gift annuity receives an income tax deduction at the time the annuity is established—not when they begin receiving income. The deduction itself is calculated using the highest possible “investment in contract,” which simply means the present value of the annuitant’s future annuity payments. Once the highest possible investment in contract is identified, that number is subtracted from the gift amount to produce the corresponding deduction.

If established with a gift of cash, the flexible gift annuity will produce tax-free and ordinary income. If established with a gift of appreciated assets, it will produce a blend of tax-free income, ordinary income and capital gains. (The ratio depends on the appreciation in the asset donated.) A significant capital gains income is still a plus for the annuitant, since it’s taxed at a more favorable rate than ordinary income.

The ‘Just In Case’ Annuity
Because 401(k)s, 403(b)s and the like are invested in the stock market, they are exposed to market volatility. Fidelity Investments has found that the average 401(k) balance ended 2022 down 23% from 2021. Though the market’s 2023 returns allowed many of these accounts to rebound, there’s no skirting the issue that defined contribution plans produce income streams that can vary. And participants must draw down their accounts through required minimum distributions (RMDs) starting at age 73 (for those born before 1960). These payments are designed to steadily reduce the size of the accounts over a retiree’s life.

With these factors in mind, you can present charitable gift annuities to your clients as an excellent way to mitigate the “longevity threat,” demonstrating a source of retirement income that the annuitant can’t outlive. A flexible gift annuity could appeal to the type of client who wants a vehicle that maximizes payments in the future, but one they can also access if they should need the money earlier than they expect. Such a “just in case” annuity could be used to offset the income lost from a 401(k) hit by market declines like the one that occurred in 2022.

A License To Give Instead Of Spend
For your boomer clients who are charitably inclined, annuity income can help them combat the perception that they don’t have a “license to spend” their retirement income, even when they want to give it to charitable causes.

To quote a 2023 Wall Street Journal article on this topic, “On the one hand, we’re grateful for the lives we have, and we want to give back. But it feels different without a paycheck.”

Only 27% of retirees who responded to the Employee Benefit Research Institute’s “2023 Retirement Confidence Survey” said they were “very confident” they will have enough money to live comfortably throughout retirement. The result is that many will likely withdraw less from their retirement plans, even to make charitable gifts. This is where a robust and flexible gift annuity program can offer a “license to give,” by providing your clients with a stream of guaranteed income that helps them feel wealthy enough to be charitable.

Kara Morin is Director of Client Services at PG Calc, the planned giving division of Foundation Source, the nation’s largest provider of technology, administration and expertise for private foundations and planned giving.