Annuities for Seniors

Kerry Pechter is an excellent resource in the retirement income world.  He publishes the  “Retirement Income Journal” and also wrote ‘annuities for dummies’ which is a great primer on annuities.

While perusing a forum the other day I read this series of quotes from Pechter, which make as much sense today as when written in 2010.

Some gems from the Retirement Income Industry Association 2010 Conference provided in this summary by Kerry Pechter:

At the Retirement Income Industry Association’s spring conference, you could almost see Jeremy Siegel standing on his head. Almost…

Siegel, author of “Stocks for the Long Run” made a powerful case for buying and holding stocks. He noted that the U.S. stock market had never posted a loss over a 20-year period.

But his proposition took a beating at the conference. So did conventional wisdom that retirees should hold stocks as a way to ensure adequate inflation-beating growth, especially those who want to make sure their portfolios last for 25 or 30 years.

On Stocks for the Long Run:

I’ve never been able to reconcile “stocks for the long run” with the warning that “past performance does not guarantee future returns.”


if stocks were a cinch to grow over the long run, then the cost of hedging against the risk of equities under performing the risk-free rate would decline over time. But it doesn’t.

On Buckets:

The question was whether it was smart to assign risky assets like small-cap stocks to the most distant periods in the belief that, like good wine, they would “mature” in value by time they were needed for income. The panel agreed that bucketing methods can be useful, but they didn’t believe that equities were guaranteed ever to mature, let alone mature by a certain date.

On Time Diversification:

What about the oft-cited evidence that the volatility of stock returns diminishes over time? According to Zwecher, it’s true that a portfolio’s average returns become less volatile over time. But the portfolio’s cumulative returns become more volatile,

On Equities and Portfolio Survival:

advisors shouldn’t encourage people who are mortality risk-averse–that is, scared of living to age 95 and running out of money along the way–to invest in stocks. “Risk is risk,” and people who are risk-averse to mortality will be equally risk-averse to equities.

Such clients should use immediate annuities or, alternately, deferred income annuities (aka “longevity insurance”) to lengthen the lives of their portfolios. They should buy equities only with money they can afford to lose.

On Safe investing:

The conference’s overall message is that retirees should buy a “floor” of risk-free income-producing assets before considering equities. After Wall Street’s recent madness, that makes sense.



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“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

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