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Moshe Milevsky On Retirement Equations

Moshe Milevsky

Moshe Milevsky’s new book,  The 7 Most Important Equations for Your Retirement, is something investors and advisors alike can look forward to.  I ordered a copy after reading an excerpt and think it’s well worth sharing with readers here. 

We have  Milevsky to thank for many of the easy to read but erudite papers on annuities, mortality, and sequence of return risks.  He’s both sensible and approachable, which is not what you’d expect from an economist…

The review was here in AdvisorOne, and is one of several reviews on that site previewing the book.  This particular piece highlights the work of the 1930’s Era Wharton professor Solomon Heubner, who was a pioneer economist and proponent of life insurance.  Heubner was an early adopter of 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 to understand and overcome this consumer aversion to annuities.  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.  

What are your thoughts? As a reader of this post you clearly see some benefits to annuities.  Why do you think the media and the general public generally resist annuities for retirement planning?

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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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