Comments on: A retirement-fund paradox

By: sportsbiz

sportsbiz — Wed, 20 Jan 2010 03:21:16 +0000

Still TIPS have a defined life (30 years) which may not address those with good genes who are afraid of outliving their money, even given your valid inflation concerns. A properly constructed single premium, immediate annuity from an insurance company that one can have confidence in, with a reasonable premium, would be a valuable product for a whole class of people who are not comfortable managing their own portfolios and want the relative security of a monthly check. There is a reasonably large market here for Berkshire to get into if you’re reading Warren.

By: maynardGkeynes

maynardGkeynes — Tue, 19 Jan 2010 19:56:35 +0000

@dWj: thanks, good point on (3). But, remember that a big component of the financial risk of good longevity genes that inflation will kill you before Mother Nature does. TIPS “insure” against inflation well and cheaply. Balanced against that, is what you said, which I guess is the point of an annuity for most people.

By: dWj

dWj — Tue, 19 Jan 2010 15:35:56 +0000

Point (2) by mGk is what I wanted to point out; (3) doesn’t hunt, though. One of the nice things about an annuity is that it gives you a set (real) income for your actual life, not your life “expectancy”. You’ll find yourself reducing your drawdown rate as you go along so you don’t run out of money if you live longer than expected, and you’re going to have some money left over. The annuity is, in these senses, an insurance product.

By: maynardGkeynes

maynardGkeynes — Tue, 19 Jan 2010 14:12:51 +0000

More basic reasons why people don’t buy annuities:

(1) With the Fed buying down the long bonds, this may be the worst time in the past or future of the world to buy a life annuity.

(2) Vanguard, the most pro-consumer mutual fund company, offered a wonderful inflation protected annuity at a great price for many years. The insurer? AIG. Unfortunately, the “life” at risk in annuities is that of the insurance company as well as your own.

(3) 30 year TIPS, which didn’t exist until just a few years ago, are a pretty good substitute for an inflation adjusted annuity, aren’t they David/Felix? And instead of a 5% sales commission plus yearly fees for the insurance broker who sends you that nice calender every year, the costs are $0 via Treasury Direct, plus fifty bucks for a Texas Instruments financial calculator to calculate the withdrawal rate over your life expectancy.

By: DavidMerkel

DavidMerkel — Tue, 19 Jan 2010 07:24:10 +0000

Thanks for mentioning my article, Felix! The immediate annuity market is reasonably competitive among insurers. The costs of the insurers cut the yield, though the yields are higher than Treasuries because of the spreads on risky debt that they invest in.

My view is annuitize some, but retain flexibility with the remainder. It’s not the best of both worlds as much as trying to minimize two different risks — longevity and inflation. It is one tough problem.