Ive been readingProfessor Moshe Milevskys work lately and was pleasantly surprised to discover this morning that he is writing a monthly column for Researchmag.ca, called Annuity Analytics. Ill be adding it to my reading list.
Its about annuities. Wait — dont stop reading! I know there was a time when I heard the word, annuity, my eyes glazed over. Chances are if you are under 55, you may have the same reaction.
However, annuities could be just as, if not more, important to your retirement than RRSPs and Couch Potato Portfolios. It would be well worth your time to learn more about them.
Most persons I know in their thirties and forties are focused on building up portfolios of stocks, bonds and other assets for their retirement. Their intention is to live off withdrawals from their accumulated capital.
But this leaves them exposed to longevity risk in their retirement years the chance they could live to 88 and outlive their capital. If you have a defined benefit pension plan, then you have a fallback option. But if you dont have one, annuities can take their place. They guarantee regular payments for as long as you live.
Milevsky recommends having amixture of withdrawal plans (e.g. RRIFs) and annuities during retirement. Annuities are purchased from insurance companies by handing over a lump sum of money. If you live longer than average, youll get your capital back and more; if you live less than the average, youll get back less (with the balance going to annuitants living longer).
Milevsky booksare good sources to learn more about annuities as ways to hedge against longevity risk.