May 12

The best return available for retirees

Believe it or not it comes from Lifetime Annuities…the obvious catch is that you need to survive beyond your life expectancy. In Australia, this product type has been totally out of favour since the government reduced social security benefits associated with them a few years back but perhaps this is an overreaction and their true value has been forgotten.

I’ll quote an extreme example from the Canadian academic, Moshe Milevsky.

Lets suppose five 95 year olds place $100 each into a term deposit, paying 6%, and after 1 year the $530 ($500 + 6% interest) is split between the survivors. Now apparently the probability of a 95 year old surviving one year is 80% which means we expect there to be four survivors splitting $530 between them or $132.50 each. That is a return of 32.5% comprising of 6% interest plus 26.5% in mortality credits.

Now a lifetime annuity does not actually allow you to cash out at the end of 1 year or any term for that matter. But, the above example still shows you how a return can be enhanced by a long life thanks to others invested int he product dying earlier. For those who live a long long time it is highly unlikely the returns on any sharemarket portfolio will outperform the lifetime annuity. So, for the retired with excellent health and a family history of long life, perhaps the lifetime annuity should be a serious consideration for part of the retirement investment portfolio.

Please note…my remuneration has absolutely no connection with the sale of lifetime annuities. In fact my employer would probably hate this article!!!

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