Monday, August 16, 2010

Annuities provide some insurance against outliving savings

Sarah Morgan has an important discussion about annuities, reproduced from Smart Money, reproduced in Yahoo! today, with the following link.

Life insurance companies promote annuity sales, and major commercial information systems, like on the Vantage mainframe system, have been written to administer them, with even more sophistication than with more traditional insurance products.

Morgan makes the point that with annuity products its possible to structure defined contribution plans (401(k)’s, etc) to behave more like defined benefit plans once one retires.

She also points out that even mathematically sophisticated people have trouble coming up with the actuarial formulas, based on the present value concept, to calculate how long any level of savings would last in a particular interest rate environment.
Annuities, properly constructed, provide some reverse life insurance against outliving one’s savings.

That’s why I’ve often written here that social security benefits are essentially, in most cases, like government-mandated annuities.

No comments: