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Longevity risk: are annuities the solution? Print

One obvious step you can take today (before retirement) to minimize these potential problems is to save more by working longer. This has the double advantage of being able to maintain a more aggressive asset allocation (the longer the period before which you anticipate withdrawing money from your portfolio, the more aggressive you can be; see asset allocation ) and also benefit by reinvesting their money over a longer period of time (the power of compound interest). Other possible solutions: to stay in a position until you are eligible for a pension (immediate or deferred), trying to earn a secondary income during retirement, choosing a more conservative withdrawal rate from your portfolio, a tighter control of your expenses etc. Buying an annuity is an ultimate possible solution to counter the risk of longevity. The purpose of this series of commentaries is to provide you with information on this product.

The following are some preliminary observations.

One, according to the glossary of InvestorED , an annuity is simply a contract that you buy from an insurance company, often for your retirement. It gives you regular income, often monthly; see also the definition of an annuity in Wikipedia or in Investopedia . There are several types of annuities: deferred, indexed, lifetime, and so on. A single premium immediate annuity is known as a SPIA. Unless otherwise indicated, an annuity in this commentary means a SPIA whose payments are available over the lifetime of a person. You may have heard about another product also called an annuity: the variable annuity in the USA, and its Canadian counterpart, segregated funds, which combines aspects of a traditional annuity with an equity component similar to a mutual fund. We consider this product too complex, too costly (to you, meaning high fees for the insurance company behind it) and insufficiently focused on addressing longevity risk then a simple SPIA life annuity. It is NOT the thrust of these commentaries.

Two, the market for annuities is a smaller and less transparent market than the stock market. We found it difficult to compile multiple sources of objective information for the independent investor on the annuities market. An example: do not seek the equivalent of a traditional share prospectus for annuities, it does not exist.

Three basic principles of our site are (See About us-Our philosophy ):

  • The equities market is efficient: you cannot beat the market.
  • Costs of investing are significant.
  • Invest accordingly (i.e. if possible, buy index products using a discount broker).

Last Updated ( Tuesday, 16 December 2008 )
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