MasterBlaster
Thinks s/he gets paid by the post
- Joined
- Jun 23, 2005
- Messages
- 4,391
Could you give some examples of the numbers you're using? The tone of your post suggests that the "portion" of your FIRE portfolio you think you need to put into an annuity paying enough in real terms in 30 years to provide longevity insurance is not large.?
To be fair here we need to distinguish two separate annuities. The first would cover the period from when you retire until your demise. The second would cover the period from the median age of death (of the annuity pool) until your demise. Subtract the cost of the second annuity from the first to get the true cost of an annuity that does not provide longevity risk. Both annuities should have an inflation rider on them so that the payment stays (in real terms) somewhat constant. Alternately, some insurance companies have started selling annuities that only kick in at older ages (age 75 or 80 for example). Those could be used instead to fund longevity risk. In the meanwhile the (remaining) nestegg could be spent to zero over the timeframe before the longevity insurance annuity kicks in. In theory nothing would be left on the table when you go.
Are these products expensive ?.... You bet they are, but they may be way cheaper than holding back your own stash to fund your own longevity risk. Again, The products are priced to some sort of pool median age. Because of that they just may be way cheaper than providing your own longevity stash.
Are the underlying insurance company fees high ?...perhaps they are, perhaps they aren't so high. As always shop around and compare. Vanguard has some great products at reasonable rates - for example.
Edit: An addition question if you don't mind. You mention that retirees hold funds in fixed investments to provide for longevity insurance if they don't have annuities. At first I thought that I'm an exception to that. My AA is approximately 50/50 5.4 years into RE (age 64). I have no special stash set aside for longevity insurance. Are you saying that if I had a significant annuity, that I could/would change the AA of my remaining portfolio to something significantly more aggressive such as 90/10 or even 100% equities?
While equities may do fantastic over long time frames, there is no guaranty that they will do so well over the timeframe that you need them to. Don't kid yourself, By holding equities in your nestegg, the risk of your portfolio is higher. There is no guaranty of growth over your timeframe of interest. Insurance companies, on the other hand, can hold their investments much longer than you can and spread the risk over people of a wide variety of ages and retirement durations. Insurance companies also have some risk, but it will be considerably less than whatever you can come up with.
Again, to recap - I am not suggesting anyone put everything into annuities. I am suggesting that we here on this forum (perhaps wrongly) reject some insurance products out of hand when they could be very helpful.
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