Retirement Equations, New Moshe Milevsky Book

I ordered a copy of Moshe Milevsky’s upcoming book,  The 7 Most Important Equations for Your Retirement, after reading an excerpt that is well worth sharing to AnnuityStraightTalk readers.

It is Milevsky we have to thank for much of the accessible but intelligent writing on annuities, mortality, and sequence of return risks.  He’s very understandable and sensible, which is not what you’d expect from an economist…

The review was here in AdvisorOne, and is well worth reading.  This particular piece (there are several excerpts on that website) highlights the work of the 1930’s Era Wharton professor Solomon Heubner, who was a pioneer economist in the often maligned world of life insurance.  Heubner pioneered the concept of using life insurance to protect the living by insuring the discounted present value of an individual’s lifetime earnings potential. 

Naturally, Heubner was also an advocate of annuities and offers two great quotes worth sharing here.  I’ll quote from Milevsky’s article, and he in turn is quoting Heubner: 

Although most students of the industry rightfully view Professor Huebner as a huge advocate of permanent and everlasting life insurance, he actually had quite a bit to say about retirement as well. His master plan was to have a policyholder convert some of his life insurance into a life annuity around the age of retirement.

His argument involved more than just mortality credits and insurance economics. In echoes of Jane Austen, he wrote:

“…Annuitants are long livers. Freedom from financial worry and fear, and contentment with a double income, are conducive to longevity. If it be true that half of human ailments are attributable at least in part to fear and worry, then the effectiveness of annuities for health and happiness must be apparent…”

I venture to guess that if Professor Huebner were alive today, he would be on the road with annuity wholesalers giving seminars to financial advisors and their clients, extolling the virtues of longevity insurance and life annuities.

Here is some additional evidence about Professor Huebner’s impact in retirement income planning. Many economists and financial experts have puzzled over the minimal appetite of consumers for life annuities — an aversion called the annuity puzzle by researchers in the field. And it seems that the annuity puzzle was puzzled over by Solomon Huebner in the 1930s, before any formal model of the lifecycle was properly developed by economists.

“…The prospect, amounting almost to a terror, of living too long makes necessary the keeping of the entire principal intact to the very end, so that … the savings of a lifetime, which the owner does not dare to enjoy will pass as an inheritance to others….Why exist on $600, assuming 3% interest on $20,000, and then live in fear, when $1,600 may be obtained annually at age 65, through an annuity for all of life and minus all the fear…”

As far as I’m concerned, this is yet another reason to include Solomon Huebner amongst the seven intellectual giants on whose shoulders 21st century retirement income planning research stands….

It’s fascinating that even 80 years ago, economists recognized and puzzled over ‘the annuity puzzle.’   There is still work to be done by the insurance industry to understand and overcome this consumer aversion to annuitization.  Economists see the world rationally… and markets are supposed to act that way too.  Every rational argument supports annuities…. yet media and the general public still resist.  

Let me know your  thoughts below-  if you’re reading this note you clearly see some benefits to annuities.  Why do you think the media and the general public generally resist annuities for retirement planning?

Written By

Bryan Anderson

6 thoughts on “Retirement Equations, New Moshe Milevsky Book

    1. Nelson- There certainly are advisors who give misleading information- I’m sure you’re run into some online. Some of the things we hear from people are truly disturbing about how certain products are portrayed.

      The link in your comment goes right to the heart of the matter however- most people considering annuities with a lifetime income rider and benefit base fundamentally don’t understand that their roll-up rate is NOT the same as their actual cash account appreciation rate. I’ll cross promote a page here:

      The misleading behavior you mentioned exists in any industry… car sales, medical devices, as-seen on TV, ‘business opportunities’, fad diets…. you name it, no matter where you go, there are people who tarnish their industry with false claims. I dare say the securities business takes the cake here… thanks Bernie Madoff.

      Frankly, I don’t correlate the resistance from so many to the actions of a few sales people. Our dear Mr Madoff didn’t cause any resistance in the securities business. Rather, I think there is something deeper ingrained in both annuities and life insurance, that has to do with nothing rational… I think that it’s more to do with facing one’s own mortality, and having to make plans around your terminal date with destiny, that is just unpleasant to contemplate… and thus, people put it off, ignore, bury their heads in the sand and hope the urge to make a plan passes…. . That’s my guess….

  1. I believe much of the resistance is related to the fact that the annuitant is “giving up” their cash, and feels a loss of control in doing so.

    Additionally, there is so little, if any, transparency, as to what to look for “behind the scenes” with the various annuities,
    that it breeds mistrust.

    If there was a master list of categories, and each annuity would check off which applies to their annuity, there might be more transparency and therefore trust and forward movement.

    1. Adrea-

      I think you’re right on there- in an email dialogue with a client today, he said the same thing- the perception of loss of liquidity was hard to stomach even in the face of clear benefits to cash flow, safety, longevity, etc. His rational brain prevailed however and he’s purchased several Secondary annuities for the yield and safety.

      I heard a good analogy a few days ago, and that was that liquidity is a lifetime equation, and not necessarily a one-off measure. In other words, preserve liquidity in your life when you need it, but when security is more important, liquidity can become a lesser concern.

      Further, proper diverse allocation of resources should never put all the eggs into one basket- allocate enough to generate the income you need, and then look at the rest. The amount left over is your liquidity, your best inflation hedge, and your truly invest- able assets.

      To your other point about confusion, I couldn’t agree with you more. Right this moment I am writing a new ‘Members Center’ for AST where I hope to make the various categories much more transparent. In the past we focused writings on specific categories of annuities (fixed, variable, hybrid, etc) then worked outwards to the benefits and features…. Going forward, I will focus much more on solutions- on the desired outcome- and make recommendations of specific products only after clients fully understand their desired goals.

      Good to hear from you again,

  2. Why am I being warned by some advisers that Life Annuities only benefit the salesman by giving him huge commissions?

    1. Financial advisors make their money – generally- by either a percentage of assets under management, or by an hourly fee for advisory services. When a client takes money ‘out of play’ and buys an annuity, the advisor no longer has assets under management upon which to assess a fee. That’s the crass reason #1 why many advisors won’t recommend annuities.
      Reason #2 is that advisors are generally stock and bond and mutual fund focused. They live in a world of ups and downs and gain and loss. They do not live In a world of guarantees and instead of guarantees try to convince you with discussions of probabilities, withdrawal rates, and ‘chances of success’ based on historical patterns.

      When all you have is a hammer, all the world’s a nail…. To most brokers and advisors, they have only one tool in their toolbox.

      Annuities are insurance products- they serve a purpose, which is to guarantee safety and/or produce income. Stocks and bonds serve another purpose, which is generally growth or income or both… but WITHOUT any form of guarantee. Thus, while there are some similarities, in many ways annuities vs stocks is an apples to oranges conversation. If you’d like to discuss your own situation and how a guaranteed income stream may- or may not- fit in, please don’t hesitate to call us.

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