Annuities can be cheaper hedge against longevity risk

Annuities and other guaranteed income products hedge longevity risk 25% to 40% cheaper than do-it-yourself portfolio optimization strategies, writes Bob Seawright. “Thus retirees who purchase an income annuity assure themselves a higher level of consumption and guarantee it as well,” he writes. Research magazine (9/2015)

Bob Seawright, Chief Investment and Information Officer of Madison Avenue Securities goes on to say in the September issue of Research magazine:

“Most “safe withdrawal” analysis assumes safety as something like a 90–95% success rate over a set period of time, commonly 25–30 years and emphasizes that most of the time, this approach should not only work, but should provide significant portfolio growth. However, with the consequences of failure being so high — being destitute at a time in life when vulnerability is at a peak — a 5–10% failure rate (which may be too low given that “100-year floods” seem to happen in the markets at least a couple of times a decade) hardly qualifies as anything like “safe.” Moreover, limiting the analysis to a set period of time is similarly deceptive on account of longevity trends.

Simply put, safe withdrawal approaches emphasize portfolio optimization and the hope for upside over putting safety first. The lure of optimization and our inherent excessive optimism conspire to push us away from guaranteed income options. I think that’s a mistake.”