Subject: Re: I like annuities
Available annuities are a truly terrible *investment* deal. It is highly unlikely you'll ever get your money back with a positive real return.

However, for someone who is quite old, that isn't really much of an issue...what you want is the tail longevity risk eliminated, not long run investment performance per se. When I've looked into suggestions for people (people write me emails--I don't give advice, merely examples), the sample annuity numbers look bad for the youngsters but not so shabby for the oldsters. You tend to get a very good income from an annuity if you buy it when you're 85-90 years old.

I usually recommend funding retirement from a portfolio as a barbell: put 10-20% aside for when you're quite mature. Say 87 as an example? Take the other 80-90% of the portfolio and run it down to zero linearly so the money runs out at that age, which is not a hard problem. For the rest, there are two approaches. The simplest is on day one, you buy a much-deferred annuity that starts payout out at that same age. Alternatively (and I think better), buy TIPS maturing at that time, and when they mature, put that into a life annuity. This has the side benefit that your estate, rather than the annuity company, gets the funds if you croak before that age. The only disadvantage is that you have something on your to-do list on your 87th birthday. (or whatever age you choose)

The main reasoning between the two-prong approach is that planning withdrawals from a portfolio in such a way to allow for great longevity is not a good wager: by definition, only a very small fraction of the population lives to an unusually old age. If everyone saves against that eventuality, most of that saving is purposeless and the wealth is never enjoyed. Only pooled solutions (annuities or tontines) really make sense for cutting off the rare "tail risk" of living a really long time. Each person participating need only commit a small fraction of their capital to the problem.

(then there's mungo's advocacy of tontines. Again, a nice idea, but requires the future risk of the estates of one's fellow tontine holders not to tie the whole thing up in court, just around the time you need the cash flow.)

I think most modern proposals involve participants putting the funds irrevocably into a trust for the benefit of the others, against which heirs would have no recourse. This involves overhead and a management fee, but it should be pretty low since about the only work is checking periodically which of the participants are still living and sending out quarterly cheques.

It's an interesting question whether it could be done as a corporation instead of a trust. A corporation could be set up to have a class of non-voting non-transferable shares which had a proviso that the share be extinguished on the death of the holder of that class of shares. That class would be non-voting on matters related to the dividend and capital distribution and liquidation rules which would be irrevocable. The advantage is that there is no trustee in the legal sense needed, only a board of directors elected by those who are still living participants. There are several potential advantages of a company. Big reputable trust firms typically charge a prohibitive percentage of assets as a fee, so that problem is avoided. The investment mandate could change with the times, if it became necessary. Corporations handle shareholders in different jurisdictions better than trusts handle beneficiaries in different jurisdictions.

Jim