Ummm.....that's not how RCLAs work at all.The reason these terrific products don't exist is that a percentage of the "ruin-contingent life annuity" customers will abuse the system, deliberately spend down their portfolios to zero and having the time of their life, knowing that the annuity will kick in. Wow, just imagine the fling I could have exhausting my investment portfolio. I dunno, extensive travel, eating out at expensive restaurants, a sports car, who knows what? I would feel like the three elderly geezers in the movie "Going in Style". I am old, what to I have to lose? If we successfully rob the bank we win, if we go down in a hail of bullets at least we go out in excitement, if the cops arrest us then we get lifetime free room and board. What is not to like?A number of kinds of insurance categories look like examples of market failure. It seems obvious that certain kind of products would be a much better fit to peoples' needs than those now offered-- but insurers don't offer them.
Obvious examples are long-term-care insurance designed to protect only and completely against tail risk (benefit exclusion period of, say, a year, but benefits continuing for a lifetime). Inflation-indexed SPIAs. Inflation-indexed deferred fixed annuities in which the payout is indexed to inflation throughout the deferral period.
And one that Moshe Milevsky wrote about, a "ruin-contingent life annuity." It works in combination with a portfolio and a systematic withdrawal system (like the "4% rule"), and pays nothing unless the portfolio value hits zero. Then it kicks in to continue to provide the same income. He wrote papers showing they were actuarially feasible. They sound as if they would be terrific products if they existed, but they don't.
Nedsaid was born to be mild. He is very mild indeed. But even he has to fight the temptation of experiencing the fling of a lifetime. Even Nedsaid likes a bit of excitement in his life.
Read the Milevsky paper.
An RCLA's guarantee only kicks in if the given real withdrawal rate would have exhausted the portfolio and it only kicks in when said exhaustion would have happened. If you exhaust your assets yourself all at once in year one by simply spending all your portfolio on a huge blowout spree then tough cookies; you don't get anything (well, unless you would have been a member of one of the unfortunate few contingents whose portfolios would indeed have been exhausted by an inflation-adjusted withdrawal anyway a la 1929 or 1966....even in that event, the RCLA payout would not have kicked in until many years after you went and foolishly blew all your portfolio in one go since said guarantee does not come into play until the actual given withdrawal rate chosen--say 4, 5, or 6 percent--would have exhausted the portfolio). The "people will abuse the system" scenario you described would be the same as committing suicide right after buying a life insurance policy; the insured would not receive any kind of payout.
Statistics: Posted by Alpha4 — Tue May 28, 2024 1:40 am — Replies 28 — Views 2069