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Annuity value declines with 'health-care shocks'
Old 07-12-2013, 10:46 AM   #1
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Annuity value declines with 'health-care shocks'

This post in the Nerd's Eye View blog (new to me) brings up some interesting points if you're pondering an annuity. In a nutshell:

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The Reichling/Smetters research represents a significant breakthrough, in that it shows why even a rational (but somewhat risk-averse) investor would choose not to annuitize, even if there is no bequest motive and the sole goal is to fund retirement, due to a combination of the illiquidity of the contract and the fact that its implicit value declines in the face of health care shocks when the need for money actually rises.
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Old 07-12-2013, 12:15 PM   #2
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Just scanning the paper, it seems that "health care shocks" = need for long term care. They assume that most people will not buy LTC insurance. So, it's not surprising that they would conclude that most people should hold liquid assets rather than annuitize.

That may be accurate, but if that's the core finding, their abstract should have been worded differently. They should have said "If people can't/don't insure against LTC costs, then it's rational to avoid annuities and keep cash."
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Old 07-12-2013, 02:35 PM   #3
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I jumped to the paper and didn't read the article. Going back to the article, the last paragraph seems like a good summary
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the bottom line is that the Reichling/Smetters study represents a significant new connection between the academic research on immediate annuitization and what financial planning practitioners observe in the real world - that people like to maintain liquidity and reserves against the unexpected risks of life (such as health shocks),
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Old 07-12-2013, 03:07 PM   #4
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the bottom line is that the Reichling/Smetters study represents a significant new connection between the academic research on immediate annuitization and what financial planning practitioners observe in the real world - that people like to maintain liquidity and reserves against the unexpected risks of life (such as health shocks),
So I'm not the only one who rejects the idea of turning over to an insurance company a big chunk of what took me 40+ years to save up?
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Old 07-12-2013, 04:50 PM   #5
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So I'm not the only one who rejects the idea of turning over to an insurance company a big chunk of what took me 40+ years to save up?
The insurance company loves you and wants you to be happy.
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Old 07-13-2013, 08:46 AM   #6
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So I'm not the only one who rejects the idea of turning over to an insurance company a big chunk of what took me 40+ years to save up?
Yep. And, it seems you're rational too, as the article goes on to say...

"...and that in such a world for retirees in particular, immediate annuities may actually be one of the least effective solutions to address such concerns, due to the fact that their value is adversely correlated to the very health shocks against which retirees are trying to protect. Accordingly, the reality may be that the low use of immediate annuities is not a behavioral fallacy or due to a lack of consumer education, but simply an entirely rational way to handle the uncertainties of future changes in life and health."

So, you've still got a wad of $$$ and you're rationale. I'd say that makes this a banner day.
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