Understanding Annuity Mortality Credits

By Michael Finke


This paper examines how retirees can spend more money each year in retirement by pooling the risk of an unknown lifespan with other retirees through an annuity – a benefit that is often described as a mortality credit. Obtaining mortality credits through the purchase of an annuity allows retirees to improve their lifestyle and worry less about the risk of outliving savings.

A 65-year-old healthy male retiree decides to invest today to fund $15,000 of income each year until the age of 100, when he has only a 5% chance of still being alive. He invests in bonds that mature in the future and provide exactly $15,000 of spending each year. For example, at today’s Treasury bond rates he can set aside $7,783 to buy $15,000 of income at age 80 and $5,227 to buy $15,000 of income at age 90.1

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Michael Finke, Ph.D. is a Professor of wealth management and Frank M. Engle Distinguished Chair in Economic Security Research at The American College of Financial Services. He received a doctorate in consumer economics from the Ohio State University in 1998 and in finance from the University of Missouri in 2011. He led the Retirement Planning and Living Consortium at Texas Tech University before moving to the American College, and is a nationally known researcher in the areas of retirement income planning, retirement spending, life satisfaction, and cognitive aging.  He is a frequent speaker at financial planning conferences and was named one of the 25 most influential people in the field of investment advising in 2020 and 2021 by Investment Advisor Magazine.

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