The seminal paper is Milevsky, M. A. and Young, V. R. (2007). “Annuitization and asset allocation.” Journal of Economic Dynamics and Control, 31, 3138–3177, DOI: https://doi.org/10.1016/j.jedc.2006.11.003For me, the basic question is why most people recommend annuities between ages 70 and 80. If we assume that pricing is fair based on life expectancy at the time of purchase, then is shouldn't matter when you make the purchase, all things being equal (which they aren't, of course). Usually for a rule of thumb there is some research paper that examines the topic, but I have not found any papers that go into the value of annuities in relation to purchasing age that justified the rule of thumb that it be purchased in your seventies, or late sixties.I’m not sure which tables you are using but it’s known that pretty much only healthy buy especially younger ages. They actually use different life expectancy tables then they do for life insurance to account for this.
The recommendation also takes into account inflation risk over very long time periods since these aren’t inflation indexed.
In the end, you never have enough information to say what is more fair from pricing.
They found that the optimum age (that is often quoted) was around 80.3 (male) and 84.5 (female) for a retiree with a low relative risk aversion (i.e., one happy to hold a high proportion of stocks while delaying purchase).
There are a number of things to unpack with this result:
1) They assumed that the retiree would hold a stock/bond portfolio while delaying purchase with particular risk/return behaviour.
2) The optimum age depends on risk aversion (retirees with high risk aversion would be better off annuitising earlier or even immediately)
3) They optimised on overall income - in 35% to 39% of cases, delaying annuitisation led to lower income. Some work I did (https://papers.ssrn.com/sol3/papers.cfm ... id=4289339) suggests that, at least historically, these cases were the ones with the lowest SWR (in other words, delaying purchase could sometimes make a bad situation worse).
There have been several recent threads on these boards comparing various annuitisation strategies (e.g., viewtopic.php?t=433101, viewtopic.php?t=432619, and viewtopic.php?t=433584) including SPIA, delayed SPIA, and DIA while using a TIPS ladder to provide income during the delay/defer period rather than a stock/bond portfolio that you might find interesting.
In brief, the conclusions are that a) inflation and b) TIPS yields have a strong effect on the 'optimum' approach and delay/defer periods (in other words, there isn't a simple rule of thumb that applies to all situations).
FWIW, my own view is that an income profile that matches what is required is far more important that mortality credits (which cannot be spent directly) or fairness. For example, while DIA provide lower money's worth than SPIA (so are less 'fair'), the "the insurance value of deferred annuities is appreciably greater than that of the immediate annuities" (see Wettstein et al, What is the value of retail annuities?).
cheers
StillGoing
cheers
StillGoing
Statistics: Posted by StillGoing — Tue Jul 09, 2024 3:55 am — Replies 5 — Views 447