Annuitization : If Not Now , When ?

In previous writing – and related papers by Chen and Milevsky (JFP, 2003) or Ameriks, Veres and Warshawsky (JFP, 2001) – the point has been made that payout annuities, either variable or fixed, have a rightful place in the optimal life-cycle portfolio. I have argued that depending on a lifecycle investor’s bequest motive versus their desire for consumption, they should have a substantial portion of their total wealth allocated to income annuities. Indeed, a product allocation of up to 75% of total wealth can be justified under a variety of methodological frameworks. This would imply that as much as 75% of desired (retirement) income can and should be longevity insured. Of course, for those lifecycle investors with a lucrative Defined Benefit (DB) pension and/or maximum Social Security benefits, a large portion of their retirement income might already contain longevity insurance. There is no need for them to acquire any more.