The Retirement Plan Solution: The Reinvention of Defined Contribution

Chapter 16. The Second Dial: Your Longevity Protection Policy

Spending policy—how much of your accumulated assets you decide to spend each year—was our first postretirement dial. The second concerns longevity—how long you live. At first sight, this may not look like a dial at all: Retirees have a high level of control over the spending dial and a fair degree of influence on the investment dial (we cannot control investment markets, but we can control which assets we invest in), but we do not have a great deal of control over how long we live (and the control we do have, we use to prolong our lives, irrespective of the financial consequences). There are, however, two ways in which the impact of life expectancy on retirement planning can be managed. The first we have already mentioned: We can reduce the length of time for which our assets need to last, by postponing the date of retirement. The second is through the purchase of an investment—an immediate annuity is the simplest example—which protects against the financial consequences of an unexpectedly long life. It is this question of longevity protection on which we will concentrate in this chapter.

HOW AN IMMEDIATE ANNUITY WORKS

In Chapter 5, we said that you can buy an immediate lifetime annuity from an insurance company for somewhat more than the cost of having enough wealth to be able to draw down the same cash flow for a period equal to your life expectancy. Give the insurance company a lump sum of that amount, and they will ...