Thanks again to all who have posted, it has been very educational, and I am glad I did this prequel. The more so, since I decided to draft the paper first, before launching the “Should You Hedge Your SPIA with a TIPS Ladder?” thread. Which will be forthcoming.
In the meantime, I’ve been disturbed here in this thread and others, by what may be merely loose usage around “mortality credits,” but which I fear may reflect a more fundamental misunderstanding.
Here is an example of problematic verbiage: “If I wait to annuitize until age 80, I’ll get more mortality credits than if I annuitize here at age 70.”
Taken literally, that is deeply wrong. Flunked, as John Barth might say.
If you wait to annuitize, you WILL get a higher payment, assuming interest rates haven’t changed. That has nothing to do with mortality credits, but reflects the insurance company’s judgment that at age 80, you are closer to death than at age 70. Which, actuarily, must be the truth.
If you are closer to death, then the insurance company can meter your premium (principal) back to you over a shorter period of years, thus increasing your annual payment.
Mortality credits never increase payments; rather, they sustain payments if you live past life expectancy. The SPIA payment received at issue reflects interest rates and life expectancy, only.*
*Technically, the insurance company looks at the entire mortality vector that averages out to life expectancy, rather than simply applying the PMT function with life expectancy as the period (as i do for purposes of getting a rough estimate). If you need page references to an actuarial textbook, please post to that effect.
**And if you have a higher SPIA payment, because you waited until closer to death to annuitize, then indeed, mortality credits will be “larger” in so far as they sustain that larger-because-closer-to-death payment.
But all mortality credits ever do is sustain payments—not increase them.
Milevsky writes eloquently about the wager you make when you delay annuitizing: https://www.google.com/books/edition/Pe ... =en&gbpv=0
Actuarily, it has to be a wash. And if interest rates go down while you wait, or if you can’t invest the premium at a high enough rate while you wait … or maybe, if you left your premium in BND through 2022, waiting for 2023 to annuitize—you lose the wager.
In the meantime, I’ve been disturbed here in this thread and others, by what may be merely loose usage around “mortality credits,” but which I fear may reflect a more fundamental misunderstanding.
Here is an example of problematic verbiage: “If I wait to annuitize until age 80, I’ll get more mortality credits than if I annuitize here at age 70.”
Taken literally, that is deeply wrong. Flunked, as John Barth might say.
If you wait to annuitize, you WILL get a higher payment, assuming interest rates haven’t changed. That has nothing to do with mortality credits, but reflects the insurance company’s judgment that at age 80, you are closer to death than at age 70. Which, actuarily, must be the truth.
If you are closer to death, then the insurance company can meter your premium (principal) back to you over a shorter period of years, thus increasing your annual payment.
Mortality credits never increase payments; rather, they sustain payments if you live past life expectancy. The SPIA payment received at issue reflects interest rates and life expectancy, only.*
*Technically, the insurance company looks at the entire mortality vector that averages out to life expectancy, rather than simply applying the PMT function with life expectancy as the period (as i do for purposes of getting a rough estimate). If you need page references to an actuarial textbook, please post to that effect.
**And if you have a higher SPIA payment, because you waited until closer to death to annuitize, then indeed, mortality credits will be “larger” in so far as they sustain that larger-because-closer-to-death payment.
But all mortality credits ever do is sustain payments—not increase them.
Milevsky writes eloquently about the wager you make when you delay annuitizing: https://www.google.com/books/edition/Pe ... =en&gbpv=0
Actuarily, it has to be a wash. And if interest rates go down while you wait, or if you can’t invest the premium at a high enough rate while you wait … or maybe, if you left your premium in BND through 2022, waiting for 2023 to annuitize—you lose the wager.
Statistics: Posted by McQ — Mon Jun 03, 2024 10:27 pm