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The Utility of Illiquidity by Garth Bernard, MAAA

It is often assumed that because individuals have a strong emotional desire for control of and access to retirement assets, they have little or no use for illiquidity in retirement, that is, that illiquid vehicles – in particular annuitization – would therefore be a less desirable component of a retirement plan.

This paper debunks this as a result perpetuated due to reasons which have less to do with emotions than with misperceptions and lack of an appropriate context within which to appreciate the value of annuitization. An example is used to demonstrate the value of including annuitization as part of a retirement plan from an analytical perspective, but also from an emotional perspective, suggesting that individuals may have a high, but untapped, utility for illiquidity.

Based on the reasons identified for lack of widespread acceptance of annuitization, the paper suggests several catalysts – most within the control of insurance manufacturers as well as external catalysts, such as economic and tax policy factors – that could spark a dramatic reversal of the current situation.

Finally, the paper suggests that some of these catalysts may already be at work and that we may be witnessing the dawn of a new era where annuitization becomes a more commonly exercised option in retirement income solutions alongside other retirement vehicles that are more widely used today.

The Challenge of Optimal Retirement Portfolios by Garth Bernard, MAAA

The abstract theory of efficient frontiers is based on sound, proven academic principles (Modern Portfolio Theory or MPT) and the practical applications derived from this theory are long established in the arena of optimal portfolios for the accumulation phase.

There are, however, a number of practical challenges to the maintenance of an optimal portfolio that are not anticipated or accounted for by the theoretical framework. The most significant of these is the passage of time, which reveals the emergence of the actual scenario the investor will live through.

This paper suggests a novel and practical “building block” approach to developing portfolios that are likely to produce the best possible results over the broadest range of scenarios that the investor may experience in the retirement phase. It has the added benefits of being easier for the investor: to truly understand; to directly engage in the solution; to see the connection to his or her needs and risks; and to connect with investors at an emotional level. The method presented is thus more likely to inspire the investor’s confidence and trust in advisors who use it.

Efficient Deployment of Retirement Assets to Increase Financial Security of Seniors and to Minimize Welfare Burden on State by Jeffrey K. Dellinger, FSA, MAAA

Individuals forgo current consumption in order to save assets for non-wage-earning retirement years, when those assets can serve as a “claim check” to procure the goods and services seniors require during traditional retirement years. Yet individuals often deploy those assets in inefficient ways as they seek to accomplish specific financial objectives, simultaneously shortchanging their own financial security and imposing a larger welfare burden on the state. In particular, one financial objective that individuals typically seek to achieve with some portion of their retirement assets is maximum inexhaustible income. What is envisaged is a large-scale awareness and educational campaign to remedy these deficiencies. The objectives are (1) to enhance the financial security of the state’s seniors and (2) to reduce the state’s fiscal burden of financially supporting seniors—often for years—who have the financial means to support themselves but who inefficiently deploy retirement assets to achieve important financial objectives and ultimately become reliant upon the state.

Good News at the Starting Gate: When to Commence Income Annuities by Jeffrey K. Dellinger, FSA, MAAA

The question arises as to the appropriate time to deploy income annuities—fixed or variable—to generate regularly scheduled income. Intuitive judgments based on the psychological makeup of many humans often lead to decisions that run counter to objective decisions that rely more on logic and less on emotion—and this phenomenon may particularly apply here. This paper looks at the issue of timing the commencement of income annuities from the perspective of a real-life client scenario of a RISE insurance company client.

This analysis quashes the misconceptions that one should take withdrawals from mutual funds or deferred annuities for a number of years and then purchase an income annuity later or purchase income annuities on a staggered basis. To the extent one’s objective is to maximize retirement income with the potential to keep pace with inflation while minimizing the probability of outliving that income, delaying income annuity purchase is suboptimal.