From: BreadWithSpam@fractious.net
Newsgroups: misc.invest.financial-plan
Subject: Re: longevity annuities
Date: Wed, 24 Oct 2007 11:26:17 -0500
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"Elizabeth Richardson"  writes:

[from Scott's paper at http://ssrn.com/abstract=992423]:
> > Given these investments, many retirees will face
> > the difficult problem of turning a pool of assets into a stream of
> > retirement income.

> Why would someone have a "difficult problem" of turning this pool of assets
> into a stream of retirement income?

The paper doesn't actually explain in particular what's
difficult about it, but the number of times we discuss
it here is a pretty strong indication.

It *is* a difficult problem - if parameters include things
like maximizing current living benefits while insuring
that one doesn't outlive one's money.

The "no-brainer" solution, of course, is an immediate
annuity.  It has some downsides (plenty of them, actually)
but for folks who need a guarantee, it's just about the
only one out there.

The paper goes on to indicate that, apparently, in '65
some other paper "proved" (don't ask me) that folks
should simply buy immediate annuities with 100% of
their nest egg.  Not *that* seems absurd to me - and
apparently it's not as obvious as all that - apparently
only a fraction of folks annuitize at all, and of them
very few annuitize more than a fraction of their money.

There are lots of other solutions - for example,
annuitize enough to pay you the absolute minimum you need
to get by and invest the rest a bit more aggresively
than you would be able to without that guarantee.

That all said, I don't see how this "longevity annuity"
is much different from any other deferred annuity during
said annuity's accumulation phase.

FWIW, there's a pretty good article on Paul Merriman's
site, FundAdvice.com, about various payout strategies
for a portfolio.  It's called "Retirement:  When your
portfolio starts paying you" and it's also a chapter
in this guy's book.  He talks about a variety of
payout strategies from the "fixed + inflation" to
the "flexible - a percentage of the remaining portfolio"
with a few bits between - with some interesting tables
showing what happens with those strategies applied to
some historical return patterns.  Very interesting.
(of course, he uses his "ultimate" portfolio of DFA
funds to come up with that stuff, and history is not
the same as future, etc. etc.  But very interesting
nonetheless).

I'm surprised at how little folks talk about that
"flexible" payout plan as compared to how often folks
simply talk about fixing a percentage at the beginning
and then bumping that quantity.  It seems pretty clear
to me that one ought to spend less when one (or one's
portfolio) is earning less, but the fixed plan never
adjusts for that.

Anyway, it doesn't seem like they need much evidence
to toss the term "difficult problem" at this.  It
doesn't seem that simple to me.

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