Paper Suggests Annuity Purchase Delay

September 7, 2007 (PLANSPONSOR.com) - A new paper from Russell Investment Group strategist Richard Fullmer suggests that individuals should not be too quick to purchase annuities.

The paper argues there should be two different strategies for acquiring wealth and one for making sure individuals get enough of a lifetime cash flow from their portfolios, which must take into account longevity risk.  

Fullmer contends in the paper that longevity risk can be turned into investment risk, allowing it to be managed within an investment portfolio. This means that individuals will not have to make spending adjustments immediately and might be able to delay the use of annuities until later, so that the ability to purchase an annuity is actively factored into the investment strategy.

“Using this approach, it is the portfolio, rather than the investor’s standard of living, that first responds to market performance and economic conditions,” said Fullmer, in a press release about the paper. “Furthermore, it seeks to allow the investor to preserve liquidity early in retirement and purchase a desired income stream in the future.”

Fuller does not make the case against annuities, just suggests delaying their use to “at some point in the future when it makes strategic sense.”

According to the press release, the paper provides a detailed explanation of how such a strategy could be executed.

It describes a new multiple period cash-flow-based investment framework that incorporates a dynamic asset allocation strategy and uses the projected cost to annuitize the investor’s desired lifetime income stream as a hurdle for managing longevity risk within the portfolio.

The full paper entitled “Modern Portfolio Decumulation: A New Strategy for Managing Retirement Income is here .

«