Saturday, February 23, 2008

Financial Analysts Journal article favoring annuities

The Financial Analysts Journal writing favorably about annuities? That grabbed my attention.

In "The Longevity Annuity: An Annuity for Everyone?" in the Jan./Feb. issue of the Financial Analysts Journal, Jason S. Scott suggests that a relatively new product called a longevity annuity can maximize retirement spending for some retirees. This is especially true for retirees who:
  • Are in good health
  • Aren't very concerned about leaving a bequest
  • Have enough wealth to afford an annuity, but not so much that they needn't worry about outliving their assets
Here's how Scott, managing director of the Retiree Research Center at Financial Engines, describes this product.
"Longevity annuities are essentially immediate annuity contracts without the initial payouts. That is, a longevity annuity involves an up-front premium with payouts that begin in the future. For example, an age-85 longevity annuity can be purchased at age 65 with payouts commencing only when and if the purchaser reaches age 85.

Longevity annuities are better than immediate annuities because they "maximize the insurance benefit per premium dollar." Scott compares the cost of securing that future spending with bonds vs. with a longevity annuity. He finds that "the future spending that costs $1.94 to secure in the bond market costs only $1.00 in the annuity market. Thus, every annuity dollar allocated to finance spending at age 85 frees up 94 cents for additional spending."

What do you think? Is this something your clients should consider?

Susan B. Weiner, CFA
Investment Writing
Writing that's an investment in your success

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