Rational Decumulation - Annuity to the Rescue

[Want2retire]

Originally Posted by Rich_in_Tampa

Want,

You should read Taleb's book "The Black Swan." It's terribly written and the author is a cynic, but it's about how we plan and plan and plan, yet most truly high-impact events happen from out of the blue and can't be planned for at all.

He speaks vaguely and confusingly about how to posture to minimize the impact of "black swans" but I didn't really get what he was saying. Nonetheless, your succinct observation is validated in the book and it was thought-provoking.

Sounds interesting. I'll look for it. It sounds like Taleb is another champion level worrier, like me! You know, he is SO right. The truly high-impact events can't be planned for at all. I have been trying, by building in safety net after safety net into my ER financial plans. Life is always an adventure, though.

[ats5g]

FinanceGeek,

You also might be interested in the better ages at which to annuitize money. I suppose it depends on your circumstances somewhat, but I don't see myself annuitizing any money before 60-65. The additional payout from annuitizing money [whether fixed, variable, or infl adjusted], just isn't great enough until then.

See Optimal Asset Allocation and The Real Option to Delay Annuitization: It’s Not Now-or-Never. For a less math intensive explanation see chapter 6 of Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance [starting on page 66]:

Thus—despite the preponderance of theoretical arguments in favor of annuitization—we are hesitant to advocate a single optimal age at which an investor should convert his or her savings account into an irreversible income annuity. Given the many trade-offs involved in this decision and numerous sources of uncertainty, we are comfortable with suggesting that prior to age 60 is too early whereas waiting until the age of 90 is too late. (At the advanced age of 90, the unisex mortality rate, q90, of 15 percent leads to mortality credits of 1,850, which are insurmountable on any investment frontier.)

For those worried about insurance company insolvency, see the portion of the paper in the OP that talks about state insurance guarantee limits. Additionally, note that it is usually the present value of your payments that is guaranteed, not necessarily the original amount of $$ you plunked down for the annuity. So, if the company you bought the annuity from at age 60 tanks when you 90, the present value of your payments at age 90 is going to be much less than the $$ you plunked down at age 60.

- Alec

[Want2retire]

Originally Posted by ats5g

For those worried about insurance company insolvency, see the portion of the paper in the OP that talks about state insurance guarantee limits.

Though it is probably very hard to believe (because it sounds like a justification, which it isn't), I actually did read the sections about that very slowly and carefully before my post. I even looked for that information.

I guess I have experienced too many of Rich_in_Tampa's "black swans". All of them seemed equally implausible and "taken care of" beforehand, or more so, but they happened anyway. Oh well! C'est la vie, I suppose.

[ats5g]

For Want2retire and anyone else interested,

National Organization of Life and Health Insurance Guaranty Associations

Search for your state's association

Search for your state's Guaranty Association Laws

- Alec

[aenlighten]

Just because some people will live past 100, doesn't mean you have the same chance. The long lived may benefit but they are likely the ones buying it anyway so it is likely between the long lived and the very long lived. Are your genes and behavior up to it?

[chinaco]

I think this study, along with the one walkinwood identified, show approaches to using annuities as part of the overall strategy of funding retirement. They propose a hybrid approach that leverages the unique strengths of each.

The interesting part of the study that caught my eye was the statement that an annuity can give the equivalent income using 25 - 40% less money.

[Want2retire]

Originally Posted by aenlighten

Just because some people will live past 100, doesn't mean you have the same chance. The long lived may benefit but they are likely the ones buying it anyway so it is likely between the long lived and the very long lived. Are your genes and behavior up to it?

In answer to your question... in my case, I believe the answer is yes.

I am not going to put a gun to my head if I happen to survive into my 90's. I am going to plan for that turn of events, so that I don't have to. That's the only approach that makes sense to me.