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Summary and Review of “The value of annuities”
The article titled "The value of annuities" by Gal Wettstein studies the impact of annuities in the
decumulation phase of retirement savings, concentrating on price and value variations over the
last 25 years. It begins by emphasizing the possible benefits of annuities in terms of longevity
insurance and consistent income streams during retirement. However, it recognizes the
constraints of rising costs and changing market conditions. The study uses money's value
calculations to investigate annuity pricing patterns and determine the projected payout of new
annuity products. It also investigates how divergent changes in mortality rates by socioeconomic
class (SES) affect the value of annuities.
The article's main point is that the value of immediate annuities has remained stable throughout
time, despite swings in mortality and interest rates. Indexed annuities have slightly lower
expected values than immediate annuities, whereas deferred annuities have far lower expected
values. Furthermore, the analysis demonstrates an increasing education gradient in annuity
returns, with highly educated persons receiving higher returns per dollar of premium.
Furthermore, considerable racial inequalities in annuity value exist, with blacks benefiting
slightly more than whites due to greater uncertainty in the time of death. These findings highlight
the need for equal access to retirement income options, as well as additional study to address
demographic and socioeconomic gaps in annuity returns.
The study also presents a utility analysis to assess the value of longevity insurance provided by
annuities, showing that all demographic groups benefit from it, albeit to varying degrees.
Reaction:
According to Investopedia when we talk about annuities it refers to an “insurance contract
created and distributed by financial institutions with the goal of paying out invested funds in a
fixed income stream in the future. Investors buy or sell annuities using monthly premiums or
lump-sum payments.”. Annuities are mostly used for retirement planning and can assist
individuals avoid the risk of outliving their funds also known as longevity risk.
The article provides valuable insights into the complex dynamics of annuities and their role in
retirement planning. It emphasizes the need of factoring in mortality rates, interest rates, and
socioeconomic position when determining the value of annuity contracts. The findings on racial
and educational gaps in annuity returns highlight the need for more fair access to retirement
income options.
Lastly, I will say that this article is a really helpful for an individual of could be planning for
retirement, and its thorough examination of several annuity choices and their possible benefits.
However, the study highlights concern about the availability and affordability of annuities for
different demographic groups. Policymakers and financial institutions should work to close these
gaps and guarantee that everyone has access to appropriate retirement income options.
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Sources -
Principles of Risk Management and Insurance, 14th Ed., George E. Rejda, Michael J.
McNamara, and William Rebel.
-
Wettstein, G., Munnell, A. H., Hou, W., & Gok, N. (2021, January 1). The Value of Annuities
. Social Science Research Network. https://doi.org/10.2139/ssrn.3797822
-
Kagan, J. (2024, January 20). Guide to Annuities: What They Are, Types, and How They Work
. Investopedia. https://www.investopedia.com/terms/a/annuity.asp
-
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