The Federal Reserve’s decision to cut its benchmark federal funds rate from 1% to a range of 0% raises significant questions for those reassessing their retirement nest egg—a common occurrence following a dramatic selloff in equities according to research conducted by Indiana University’s Alessandro Previtero —and the value of annuities in providing guaranteed lifetime income.

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As the stock market experienced unprecedented growth over the past eleven years, many people were naturally less interested in the lifetime income options from pensions or annuities. Who wouldn’t rather have all the assets today so they can invest them with the idea of earning high returns?

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Longevity risk—the risk of running out of assets before running out of time—is fundamental to retirement. We know about the distribution of longevity for the overall population, but an individual cannot know in advance precisely where he or she will fall in the distribution.

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With all of my discussions of annuities lately, it is worthwhile to also consider the sensitivity of annuity pricing to interest rates, gender and age-related mortality factors. Relationship Between Payout Rates and Interest Rates Figure 1 estimates the relationship between annuity payout rates and interest rates for 65-year old males, females, and opposite-gender couples with…

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In today’s scenario, we’ll see what happens to the price of an annuity if:
1. We guarantee income will be provided for at least 10 years, regardless of whether the annuitant lives.
2. We provide a cash refund if the annuitant dies before at least receiving their full principal payment.
3. We include a cost-of-living adjustment for annuity payments.

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