Agreed, two different risks and they are longevity and inflation. The longer you live your lifetime expenses are higher. The higher your annual expenses (due to inflation) your lifetime expenses are higher. The cumulative effects of both can be severe.They're two distinct risks though?
Since the point of money is to purchase real goods and services, not to have so many numbers of an abstract concept, AND since future inflation is essentially unpredictable, I disagree strongly that nominal annuities “protect against longevity risk” in any non-academic, ex ante sense
For a given remaining lifetime, I don't know what inflation will be. But I can protect against inflation with a TIPS ladder covering that remaining lifetime, thus, providing lifetime inflation adjusted income.
Similarly, for a given inflation path, I don't know how long I will live. But I can protect against longevity risk by purchasing an annuity with payments increasing exactly with inflation, thus, providing lifetime inflation adjusted income.
1) One can create a TIPS ladder past expected longevity rates are not completely isolated from longevity risks if you live even longer than the TIPS ladder and your expenses in retirement could exceed the CPI.
2) One can purchase an SPIA beyond expected individual annual expenses are not completely isolated from longevity risks since the retiree expenses can be higher than the CPI.
3) Any combination of #1 and #2
If you select #1, the biggest opportunity loss is living too long and not taking advantage of longevity credits.
What age do you extend the ladder out to help mitigate this opportunity loss beyond the actuarial tables, 85, 90, 95, 100, 105? How will higher-than-CPI inflation values in retirement be addressed?
If you select #2, the biggest opportunity loss is the loss of inheritance and not taking advantage of CPI-indexed treasury bonds.
What higher than CPI inflation values are to be projected beyond the actuarial table ages? What values is the inheritance loss to you and your heirs?
pick your poison
Statistics: Posted by 2pedals — Tue Feb 04, 2025 11:04 pm — Replies 15 — Views 913