Bogleheads

[nisiprius]

Vig Oren has quoted you, below, on the wisdom of delaying annuitization. Do you discuss this in one of your books? If so, tell me which one and I'll go read it.

I really want to understand the details and assumptions behind your remarks, because I keep running numbers that seem to show that, assuming that an SPIA is being used in a risk-averse way to fund truly necessary, almost-non-reducible expenses, there is a dollar advantage in buying the SPIA earlier. For example, under one set of assumptions and numbers, I find that it's better to buy an SPIA at age 65 than at age 80 unless you are quite sure that you have an way of investing money at a very safe 6.8%.

Caveats: a) Even if the dollar advantage is really there, a sane person could decide either way whether that advantage does or does not outweigh such imponderables as reducing one's legacy, insurance company insolvency risk, opportunity cost of irrevocably commiting the funds or not.

b) Obviously if you're willing to accept risk you can create a scenario where you do much better on the average than the SPIA, but occasionally do worse. But my assumption is that the SPIA is being used to fund expenses where "failure is not an option."

Vig Oren quoted you:

[DaleMaley]

Do a Google search on annuities and Milevsky..........he has done at least 2 papers on immediate annuities. In one of them, he suggests delaying immediate annuities until mid 80's. They might be in the Boglehead Library already.

I would link to these articles.......but I have to head to work.





ooops......I originally posted Bodie.........but I made a mistake .....it is Milevsky.
_________________
Dale
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Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

[bob u.]

My (albeit vague) recollection of Larry's comments about delaying annuitization leads me to think he was drawing on Moshe Milevsky's work, especially The Calculus of Retirement Income. For example, on pages 281-82 of Milevsky's book Milevsky writes: "uncertainty about future interest rates, mortality, insurance loads, and product design all increase the value of the option to delay. Stated differently, my main argument is that retirees should refrain from annuitizing today, because they may get an even better deal tomorrow."

On the other hand, Milevksy has also argued that somewhere between ages 65 - 75 may be an ideal time to annuitize. http://biz.yahoo.com/brn/070612/21752.html?.v=1 Bob U.

[sscritic]

nisiprius:

I am not sure that you and the quoted passage disagree.

You wrote:

[nisiprius]

[sscritic]

[larryswedroe]

from my next book on alternative investments
When to Purchase a Fixed Annuity

In general, the research indicates that it is preferable to delay annuitization (see Glossary) until the mid 70s or early 80s. One study concluded that a sixty-five-year-old female has an 85 percent chance of being able to beat the rate of return from a life annuity until age eighty. For males the figure was 80 percent.4
There are two main reasons for this. The first is that the insurance company, in addition to covering its costs of marketing, underwriting and issuing the contracts, is building in a profit. The second is that the insurance companies that issue these policies are aware that they are being adversely selected—the most likely buyers of longevity insurance are those who have a good reason to believe that they will live a longer than average life. Thus, unless you are highly risk averse you should probably not buy an immediate fixed annuity until you approach age eighty. Similarly, if you are considering buying a deferred fixed annuity, you should consider delaying payments until age eighty.
We do offer two caveats. There are risks in delaying the purchase of an immediate annuity. First, there is the risk that if life expectancy increases, the cost of the annuity will increase. A 2006 study calculated that a 1 percent annual improvement in mortality is associated with roughly a 5 percent increase in the price of an annuity, or a 5 percent reduction in monthly payouts.5 Second, there is the risk that interest rates will fall, leading to lower monthly payouts when you annuitize.

4. Moshe Arye Milevsky, “Optimal Annuitization Policies: Analysis of the Options,” North American Actuarial Journal, Volume 5, Number 1.
5.David F. Babbel and Craig B. Merrill, “Rational Decumulation,” July 2006.

Hope that helps

[sscritic]

Here is another strategy.

Suppose you are 60 and want to retire at 62. You figure your social security benefit at age 66 will be $2000 a month ($24,000 a year). Using real dollars (since SS will be COLAed), you can get $18,000 a year at age 62 or $31,680 a year at age 70. If your core expenses are $30,000 a year, you could delay social security to age 70 and buy a eight year fixed period single premium fixed annuity to begin at age 62 and pay until age 69 paying $30,000 a year. At age 70, the annuity payments end and social security starts.

You could also buy a CD ladder of 2, 3, 4, ... , 9 years to cover ages 62 to 69. Both strategies are risk averse, and you don't you don't lose by dying early (except for the SS - but your widow could be better off if you live past 66).

[alec]

Here's the Milevsky paper. Check out section 3.4.1., in which Milevsky notes that the reason the balanced portfolio [with equities] beats the SPIA is because the equities have a higher expected return than fixed income. and then:

[bobcat2]

Zvi Bodie does not recommend waiting until your mid 80's to annuitize. What Bodie does recommend is investing the core of your retirement portfolio before retirement in safe investments (primarily TIPS and Ibonds) so that you are almost certain of having enough financial resources at retirement to fund your minimum acceptable level of retirement income.

Fund the minimum acceptable retirement income level thru a combination of SS, real annuities, pension benefits, and laddered TIPS and Ibonds. The remainder of your retirement portfolio should be a well diversified portfolio of risky and low risk assets with the tilt depending on how much portfolio risk you want to take, given that your minimum retirement income goal has already been met with a high degree of safety.

BTW there is no reason to view purchasing life annuities as a one time event . You could buy an annuity at retirement that gets you relatively close to your minimum acceptable retirement income. As you age buy more annuities from your gains in your retirement portfolio to move closer to your targeted retirement income through annuitization.

Bob K
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A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents die and a new generation grows up that is familiar with it.

[nisiprius]

[nisiprius]

[nisiprius]

[bobcat2]

After reading Larry Swedroe's above post where he references Babbel and Merrill's paper Rational Decumulation, I went back and reread the paper. Here on pages 24-25 are their recommendations:

[bob u.]

Here's a neat recent interview with Milevsky. He has quite a pedigree in all respects. http://davidmacchiablog.com/?p=105%22 Bob U.

[Gordon]

At age 80 an SPIA will return a cash flow of 12.7% on your initial investment for a single male. Every state has some type of guarantee to back the annuity. usually up to $100,000. Today AAA rated insurance companies are scarce.

Met Life and Hartford offer for an 80 year old what they call longevity annuities. These creatures return up to 29 % plus of your initial investment starting at age 85 or so.

You risk loosing all your investment prior to the start of the pay out and gain recovering your investment plus some unknown amount of funds at some time in the future.

What this amounts to is those who die before the median age are paying for those who live longer than the median age. Either way you will never run out of money.

[raywax]

Gordon said "Today AAA rated insurance companies are scarce."

There are three or four of them, I forget which. One it TIAA. I expect Bob U knows the exact number and the identity of the others.

Ray