UnThreaded | Threaded | Whole Thread (23) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75640  
Subject: Re: Drop Stocks, Buy an Annuity? Date: 7/13/2011 11:35 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Mad

I didn't include mortality risk in my reasoning, because in nominal dollars its a wash. The annuitant risks giving up 'unused' dollars at premature death in exchange for mitigating superannuation (outliving your savings withdrawals). But in time weighted dollars, the mortality risk is also a loss to the annuitant, as dollars lost due to premature death are worth more than dollars collected if one lives beyond life expectancy.

For an ultra simplistic example...lets say there are twins A and B, who both buy a life annuity at age 65 for $100,000 (each), and both are expected to survive to age 88. Brother A dies prematurely at age 84 while twin B lives to age 92. At the death of twin A, the insurer sets aside enough of the 'unused' portion of twin A's premium to cover the risk of twin B outliving his. The unused part of twin A's premium is $25,000...but the amount of this the insurer keeps invested is only $15,000, as this will grow over the ensuing 8 years to fund twin B's longer life. The difference (25,000 - 15,000 = 10,000) is revenue to the insurer.

Of course, the actual calculations are much much more complicated, taking into account large risk pools, probability targets, mortality 'drifting', etc, etc. But the concept is the same.

Now, this doesn't mean one should not annuitize....it only means that it is an expensive way to create a future income stream.

BruceM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (23) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

The Retire Early Home Page
Discussion on accelerating retirement day.
Post of the Day:
Apple

Apple and Ninety Years Ago
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement