One way to evaluate a pension buyout involves determining what your future pension payments are worth today and then comparing that value to the buyout offer.

In other words, compare the lump sum pension buyout offer to what would you have to pay today to buy and annuity that locks-in a future stream of income that lasts for the rest of your life.

A common question is how annuities compare to other financial products that seem similar such as bonds, certificates of deposit (CD) and money market funds.  After all, each of these products promises to provide some type of fixed return in exchange for your investment. 

Looking at a simple life annuity can help answer this question and may also highlight what makes the life annuities unique among all financial products. 

As discussed in a recent post, ultra low interest rates are an enormous burden for retirees.  Low interest rates make it difficult to produce reasonable levels of yield and increase the present value of future liabilities (retirement spending is a liability).

Risk Management Solutions (RMS) is well known as a leader in the area of catastrophe modeling and analytics.  The company provides its services to a broad range of insurers, reinsurers, consultants and capital markets participants who are active in the property and casualty insurance industry.

Swiss Re is preparing to issue the first catastrophe bond linked to longevity risk.

Catastrophe bonds ("cat bonds") are insurance linked securities that pass along risks to capital markets participants rather than an insurance company balance sheet.

Cat bonds are more commonly structured for natural disasters such as earthquakes or hurricanes.

The Swiss Re security is an eight year bond that will be based on the difference between the annualized mortality improvement in a UK-based age group and the annualized mortality improvement in a U.S. age group.

Scientists at Stanford University and the University of Texas at Austin published a study that suggests moderate to heavy alchohol consumption may actually be beneficial from a longevity perspective.

The study tracked 1,824 individuals over a 20 year period.  It should be notes that the study focused on individuals between the ages of 55-65.

Results indicate:

A recent article in Nature magazine suggests that the majority of children born since 2000 will celebrate their 100th birthdays in the twenty second century.

The article acknowledges that the rate of senescence or biological aging has proven remarkably constant across over time.

The CFA Institute recently published an interview with Amlan Roy in the March/April issue of CFA Magazine.

Amlan Roy is the head of global demographics and pension research at Credit Suisse in London.

Glenn Daily is one of the top financial advisors in the country. 

Specializing in life insurance and annuities, Glenn is widely recognized for his deep technical expertise and high level of objectivity as his services are strictly on a fee-only basis.

The annuity buying decision is complex and can be affected by commission-based financial incentives. Glenn’s writing, interviews and services are a great way to cut through some of the clutter.

Longevity risk is clearly a huge growth market.  One has to wonder, though, where the capacity to address this market opportunity will come from.