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Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life, 2nd Edition by Moshe A. Milevsky, Alexandra C. Macqueen

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6 An Introduction to Life Annuities

With any luck, our description of the new risks of retirement in the first part of the book didn’t concern you too much and you are actually looking forward to the possibility of 35 years of retirement (or perhaps even longer!). Still, what should cause some apprehension is the chance that your retirement nest egg (your financial capital) will not last as long as you do. Paying for 30 to 40 years of retirement can create quite a burden on you, your portfolio, and perhaps even your children. The good news is that you can insure against this kind of risk, and at a very reasonable price.

Now, yes, one normally thinks about buying insurance to protect you if terrible things happen, like your house burning down, or your car getting totaled, or you being paralyzed from an accident, or some other horrible thing like that. But the truth is that these days you can also buy insurance against things that are only kind of bad, including almost anything that might cause you personal stress or economic discomfort. For example, you can buy insurance to protect you against the price of your morning coffee doubling next year as a result of a drought in the Ivory Coast, and you can buy insurance to protect your stock portfolio from suffering losses in the market, which can be catastrophic when you are about to retire.

In general, our view on insurance policies—whether they are extended warranties, product replacement plans, or life insurance—is that you should ...

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