# Aging Parents, books on annuities?



## Financial Cents (Jul 22, 2010)

Hey folks,

While I'm somewhat versed on this topic (not aging parents, rather annuities ), I'm wondering if folks have any recommendations for great books on annuities, learning more about them.

I'm interested in understanding some unbiased and objective points of view on this subject (i.e., not from life insurance companies).

Thanks for any book recommendations you can provide CMF members!

Cheers,
Mark


----------



## MoneyGal (Apr 24, 2009)

There are few accessible works on annuities. 

You could try Annuities for Dummies by Kerry Pechter, but it is written for a U.S. audience and much of the terminology, plus all of the tax information, will not be applicable to a Canadian. 

You could try The Calculus of Retirement Income by Moshe Milevsky, but it is actually a calculus textbook so if you wanted some light reading, this ain't it (but you could skip all the equations and still get a lot). (Also, this is not a Canadian-specific reference.)

You could read Milevsky's "Annuity Analytics" and "Retirement Income University" series on ResearchMag.com; many of those columns deal with annuities in a very basic way (typically by addressing one aspect of annuitization). (Again, not Canadian.)

You won't actually find *that* much written about annuities by life insurance companies / salespeople, largely because the plain vanilla annuity (as opposed to the variable annuity, or "guaranteed minimum withdrawal benefit" product) holds only a very very small share of an already-small annuity market in Canada.


----------



## Four Pillars (Apr 5, 2009)

I'd recommend Money Gal's book - Pensionize your Nest Egg.

It explains the basics of annuities and more importantly - different ways/strategies they can be used. 

My review - http://www.moneysmartsblog.com/pensionize-your-nest-egg-book-review-milevsky-and-macqueen/


----------



## Financial Cents (Jul 22, 2010)

Thanks Mike.

I know about MoneyGal's book and it's at the top of my list. Just wondering if were any others to consider. Not that I'm steering my parents into an annuity, I simply want to help them understand the range of products and investment options for retirees, the good, the bad and the ugly in all. 

@MoneyGal, maybe some more royalties coming your way courtesy of me 

Cheers,
My Own Advisor


----------



## MoneyGal (Apr 24, 2009)




----------



## MoneyGal (Apr 24, 2009)

Because The-Royal-Mail does not like little posts like the one I just made, I will add a few words on annuities. 

The most misunderstood aspect of annuitization is the role of interest rates. People will often say, "I will buy an annuity when interest rates rise - not now, in a low interest-rate environment." 

There are a couple of pitfalls with this argument. The first is that annuities are priced off the long-term yield, not short-term rates. So what "interest rate" are people thinking of when they talk about waiting for rates to rise? 

Secondly, if you think through annuitization carefully, you will realize that the decision to delay (presuming you need the income stream) has a cost as well. For example: If I am a 67-year-old woman and want a guaranteed income stream of $5000 per month, I could buy an annuity today and let's say I will get that guaranteed amount. But if I wait five years (and all other factors held constant), the cost of that same annuitized income stream will have fallen considerably. So should I buy now (for certainty at a higher price) or should I wait? 

Here's the relevant question: what interest rate do I need to earn on my invested funds in order to (1) receive $5,000 per month from my investments during the waiting period and (2) preserve sufficient capital to buy an annuity generating $5000 per month at the time I want to annuitize?

This calculation is known as the implied longevity yield and it provides a way to examine investments and annuities on a "level playing field."

Put a slightly different way: if you want a guaranteed return, with no chance of loss of capital, you may find that you need a rate of return higher than you can achieve without risk in order to preserve your capacity to generate an annuitized stream of income at a future date. In the retirement phase of life, no other source of income pays as much as an annuity, conditional on survival. 

Here's a link to an implied longevity yield calculator for the math nerds among us: http://www.cannex.com/canada/english/


----------



## Financial Cents (Jul 22, 2010)

Thanks MG!


----------



## andrewf (Mar 1, 2010)

Great post, MG. I don't think you mentioned that in the book (but it's been a while since I read it).

I'll also note that even long term rates are at historic lows. 10 year yields of 3.5% would have sounded impossible to us a decade ago. I don't know how quickly they will rise when rates normalize, but they have to rise somewhat.


----------



## MoneyGal (Apr 24, 2009)

It's there in a very high-level way (on page 83 to be precise). 

Annuities are one of the most-misunderstood products out there, and the arguments for/against are often very simplistic (i.e., as I said, "interest rates are too low"). 

I am doing more and more work in the area of annuities, so they are on my mind. If anyone is doing the Registered Financial Planners exam this fall, I'm the annuities expert at the conference. (Non-members are invited to attend; some of you financial bloggers might want to request a press pass!)


----------



## sleek (May 13, 2009)

For older people, the majority of return from annuities comes from "mortality credits" (i.e., other people dying), not from interest rates. Even if interest rates were zero, it would still make sense to buy an annuity.

Think of it this way. If you were single with no dependents and you had a lump sum of money to live off, you would always be afraid of outliving your money so you would restrict your spending. Because of that, you would die with a good portion of your money unspent, that is to say, wasted. Annuities solve this problem by eliminating longevity risk. The ones who die earlier than the averages subsidize those who live longer than the averages.


----------



## CanadianCapitalist (Mar 31, 2009)

I highly recommend MoneyGal's book as well. It helped me understand a lot of issues surrounding planning for retirement. I also learnt a lot -- I didn't know all that much about annuities before reading the book.


----------



## Financial Cents (Jul 22, 2010)

Thanks Ram. On the buy list.


----------



## kerik68 (Jul 1, 2011)

I've just ordered MoneyGal's book and was happy to see it is available for my Kindle.


----------

