Page 17 - Investment Advisor February/March 2023

whose payout starts at 75, according to As the authors explain, the first prin- participant buys an annuity at retire-
the authors. ciple turns on the fact that annuity issu- ment with the same lifetime month-
Given the strong outperformance of ers tend to offer higher prices to annuity ly payouts as the participant who is
the gradual annuity purchase approach, purchasers who are older, with the gradually annuitizing their savings,
the authors suggest, it is worth asking operative assumption being that only that individual ends up with less liquid
1
what are the sources of this advantage. healthier older investors with greater assets outside their annuity holdings
They suggest that knowing the driving anticipated life expectancy will make in the large majority of the return sce-
factors of the outperformance can shed annuity purchases at more advanced narios examined.
Many times, according to the authors,
ages, such at 65.
light on the main principles through
# which one could create a more sophis- risk is mitigated through multiple pur- the participant who spaced out their
The second principle, that sequence
annuity purchases is ahead by “a very
ticated strategy to achieve even more
efficient annuitization at retirement.
substantial amount” equal to more than
chases, is based on the simple notion
that one can reduce the variance of the
10 months of their final salary. Of course,
The authors claim that the two main
principles that drive the efficiency of
edly sampling from the distribution of
not always end up better off, but when
gradual annuitization are, first, the ben- overall investment outcome by repeat- the gradual-purchase participant does
efits of early annuitization from the mit- yields rather than taking a single sample they do fall short of the traditional
igation of adverse selection issues, and and buying at the time of retirement. TDF participant, it is not by very much
second, the mitigation of sequence risk money. The average loss in the cases
through multiple purchases of annui- CONCLUSION where the gradual-purchase strategy
ties at different dates over the span of a The authors suggest their main and ends up behind is of the order of two
decade or more. most robust finding is that, if the TDF months of final salary.
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