I am a fan of Mike Piper (Oblivious Investor). One of the things I like about him is he will provide information and views that are counter to his position on financial issues. In his Investing Blog Roundup e-mail I received this morning, he provides a link to a New York Times business section article of January 29, 2016 that contains counterpoints to his thoughts that too few people buy annuities*. His e-mail contains a link to this article by Christopher Ferrell: http://www.nytimes.com/2016/01/30/y...native-to-shaky-markets-not-so-fast.html?_r=0. I was able to read the entire article without a subscription so hopefully this link works for those who would care to have a gander. Personally, I do not believe an annuity is in my and my wife's future retirement planning.
What I found interesting in addition to the "don't buy an annuity" discussion was the reference to a Congressional Budget Office (CBO) study published in 2013 by Felix Reichling and Kent Smetters with the easy-to-understand title "Optimal Annuitization with Stochastic Mortality Probabilities" (link:https://www.cbo.gov/sites/default/f...74_MortalityProbabilities-Reichling_2_0_1.pdf)
The first sentence of this CBO paper is pretty provocative in my opinion: "The classic paper of Yaari (1965) demonstrated that the demand for annuities should be so strong that life cycle consumers without a bequest motive should invest all of their savings inside an annuity contract." The authors then proceed to demonstrate that their mathematical calculations and inputs show that the majority of individuals with retirement savings should not buy an annuity regardless of wealth ("We find that 63% of households should not annuitize any wealth, even with no transaction costs, ad hoc “liquidity constraints,” or bequest motives. In contrast, the Yaari model predicts 0%." See page 2 of the study).
If you want to know how they came up with 63% as well as their mathematical calculations and inputs, you'll have to read the paper. Hey, it's 46 pages long; I'm not going to summarize the entire thing for you.
The NYT article quoted Kent Smetters as saying that if one is to buy an annuity, he recommends that individual have at least $500,000 in other monies to pay for medical expenses and other unplanned needs as well. OK, its more than a recommendation - he says anyone with that half-million in other savings should buy an annuity.
I know all of this is a long-winded way of saying annuities are not a good deal for most individuals, but I think it might provide additional food for thought for those contemplating purchasing one. Plus, one can always throw the Euler equations in the CBO study at an annuity salesperson who comes a callin' and see if they can disprove them...
*In fairness to Mike, he also says "many people would benefit from exchanging a portion of their liquid assets for a guaranteed stream of lifetime income (most often by delaying Social Security...)
What I found interesting in addition to the "don't buy an annuity" discussion was the reference to a Congressional Budget Office (CBO) study published in 2013 by Felix Reichling and Kent Smetters with the easy-to-understand title "Optimal Annuitization with Stochastic Mortality Probabilities" (link:https://www.cbo.gov/sites/default/f...74_MortalityProbabilities-Reichling_2_0_1.pdf)
The first sentence of this CBO paper is pretty provocative in my opinion: "The classic paper of Yaari (1965) demonstrated that the demand for annuities should be so strong that life cycle consumers without a bequest motive should invest all of their savings inside an annuity contract." The authors then proceed to demonstrate that their mathematical calculations and inputs show that the majority of individuals with retirement savings should not buy an annuity regardless of wealth ("We find that 63% of households should not annuitize any wealth, even with no transaction costs, ad hoc “liquidity constraints,” or bequest motives. In contrast, the Yaari model predicts 0%." See page 2 of the study).
If you want to know how they came up with 63% as well as their mathematical calculations and inputs, you'll have to read the paper. Hey, it's 46 pages long; I'm not going to summarize the entire thing for you.
The NYT article quoted Kent Smetters as saying that if one is to buy an annuity, he recommends that individual have at least $500,000 in other monies to pay for medical expenses and other unplanned needs as well. OK, its more than a recommendation - he says anyone with that half-million in other savings should buy an annuity.
I know all of this is a long-winded way of saying annuities are not a good deal for most individuals, but I think it might provide additional food for thought for those contemplating purchasing one. Plus, one can always throw the Euler equations in the CBO study at an annuity salesperson who comes a callin' and see if they can disprove them...
*In fairness to Mike, he also says "many people would benefit from exchanging a portion of their liquid assets for a guaranteed stream of lifetime income (most often by delaying Social Security...)