Staggered annuitisation could offer retirement security

Staggered annuitisations could help solve retirement planning problems, such as increased and uncertain longevity and unknown future inflation and interest rates, while mitigating risks association with annuities, according to CommInsure.

Professor David Babbel of the Wharton School at the University of Pennsylvania, is helping CommInsure create a flexible approach to annuitisation, said that the major challenges in managing retirement included increased longevity, uncertainty around lifetime, and inflation and interest rate uncertainty.

Under the popular ‘four per cent’ retirement rule, for example, most retirees would “run out of money before they run out of life” in light of the above issues, Babbel believed.

He said that staggered annuitisation was an effective means of managing retirement finances to mitigate these risks.

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The staggered approach would see investors cash out short-term annuities to buy lifetime income ones as they moved through the retirement phase, which Babbel said was “a fresh strategy that shows the effect of using short term and lifetime annuities together to manage retirement income over the long term.”

Babble recommended a ‘four-bucket’ approach, in which clients would spread their annuities across four types. They would have an immediate income annuity bucket, a deferred income one, which they could turn on later in retirement, a rainy-day bucket containing a term certain annuity, and then a final option ‘early inheritance’ bucket for gifting.

There would be a benefit to opting to give early inheritance, Babbel said, as it would allow beneficiaries to receive the funds at a life stage where they could prove more useful and let benefactors witness their use. He cited the old adage, “better to give with a warm hand than a cold hand.”

Furthermore, Babbel said that major concerns about annuitisations could be controlled or minimised in Australia.

The biggest issue with fixed annuities, according to Babbel, is the impact of inflation on the buying value of the funds invested in them. This could be solved two ways; through inflation-indexed annuities (which are offered by both CommInsure and Challenger in Australia) or through staggered annuitisation.

Traditional reservations about annuitisations in terms of default risk are also less concerning in Australia than abroad, as there is stricter insurance regulation to minimise such threats.