bobcat2 wrote:Consider the following quote from the interview.
Q. What investment products are we talking about?
A. One category is pensions or annuities, typically a fixed monthly check that an insurance company or pension fund guarantees to keep sending you as long as you live. That's a great solution to longevity risk.
But it's not much help against inflation, which will erode the value of any fixed payment over time.
Now economists would be nearly unanimous in saying the best way to solve the combined risks of longevity and inflation in retirement is to purchase real (inflation-indexed) life annuities. Milevsky, on the other hand, completely ignores this obvious solution and instead touts these oddball variable annuities with living benefits.
I noticed that too.
It's weird. He owed the reporter at least a soundbite aside of his
reason for ignoring them.
I'd recently something to Vig Oren about his six
rules for buying SPIAs I agree with all of them and think they're an admirable succinct summation except for his comment on "Don't buy riders such as inflation indexation b/c they are too expensive (from Moshe Milevsky)."
That baffles me, because they're not significantly more expense than, say, a 3%-compounded-increase option. I've done some very casual math and the prices are not obviously
way out of whack... and it seems to me an insurer who offers one is taking on a lot of extra risk because inflation is uncertain (and the longest TIPS only go out twenty years), and perhaps because you're moving the center of gravity of the payouts farther into the future.
The whole concept of inflation-indexed SPIAs being "too expensive" is weird, anyway. It's always less expensive to self-insure if you can afford it. But if you can't, you buy insurance and accept the fact that the insurance company is going to make money. I think that when you buy insurance the
first priority to match the insurance to the risk as closely as possible, and only
second to keep the costs as low as possible. Buying insurance that's a mismatch to the risk is a false economy. An SPIA is longevity insurance. You buy it mostly for the payments you're going to get if you're lucky and live a long time. A level payout SPIA gives you fewer real dollars at exactly the time of life when you need them most.
There almost seems to be a feeling that it's
cheating to use things like TIPS and inflation-indexed SPIAs when discussing retirement planning because they're just too
easy and take all the fun out of it. Either that, or people are still thinking inside a decades-old box... so there are umpteen gazillion papers written before these vehicles existed ringing all the changes on what you can and can't do without them.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.