Longevity And 25 Other Retirement Risks: Financial Advisors' Daily Digest

by: SA For FAs

Dirk Cotton lists 26 distinct retirement risks; your correspondent questions what recent insurance company behavior says about longevity risk.

Jeff Miller’s Stock Exchange gang discuss whether one can trade geopolitical risk.

Mark Mobius looks back at lessons of the Asian Financial Crisis two decades ago.

The list of retirement risks to mitigate in your retirement plan is mind-numbing. If you don’t believe me, take a look at the list Dirk Cotton has compiled from a variety of sources. It weighs in at 26 items. While I certainly can see value in a financial advisor using such a list to help clients customize a financial plan – since every client’s situation is different and thus the factors can be weighted differently – I nevertheless think that for most people, most of the time, the solution is going to be fairly similar: spending less than you earn and saving and investing the rest on a globally diversified basis over as long of a time as possible.

The rule-of-thumb goal should be to try to match your pre-retirement income on an after-tax basis; (reduced spending in your eighties or nineties can make room for increased charitable giving as well as gifts for the kids and grandkids.)

It’s not a useless exercise, especially for financial professionals helping clients, to attempt greater rigor than my rule of thumb, by assigning values to all of these risks and crunching the numbers. But as I’ve noted many times previously, some things, like longevity risk, are just unknowable.

The ever-increasing duration of lifespans adds pressure to increase savings; as un-fun as that sounds, it’s a lot better than the alternative. One popular way to address this risk is to insure it via an annuity. We’ve addressed that topic before, and the consensus opinion among readers in this forum was that it was a bad move, i.e., readers typically felt that insurance companies were getting the better of the annuitants.

My purpose is not to relaunch that debate. But I will note here an interesting and new (so far as I can tell) phenomenon. The Hartford, one of the major annuity issuers, has just unloaded $1.6 billion of its liabilities on Prudential. As the above-linked article notes, there has been a huge spike in such liability transfers in the past year.

In other words, the Hartford and other companies are taking out annuities from Prudential and other insurers, because these companies seem not to want to be on the hook to pay out benefits to annuitants living ever longer. It’s possible (maybe likely) that I’m not getting the nuances. It may be more a function of today’s low interest rates and the difficulty companies have in investing premiums to guarantee future returns. In any event, be it because of longer lives or changing market conditions, it’s by no means clear that the policy holders looking to hedge their longevity risk are not getting a fair deal.

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