Blogs & Comment

Book review: pensionize your nest egg

I enjoyed reading Pensionize Your Nest Eggby finance professor Moshe Milevsky and certified financial planner Alexandra Macqueen. Much of the book covers material Milevsky has presented in previous books and articles, but its done in a more accessible and focused way.
The book stresses the importance of annuities in retirement planning. If you are approaching (or in) retirement without a defined benefit (DB) pension, you should seriously consider putting part of your retirement nest egg into annuities to address the longevity and sequence-of-returns risksa DB plan would have covered off.
While the book reworks content from Milevskys writing elsewhere, it also has some new sections (at least for me), specifically Chapter 6 on life annuities and Chapter 8 on variable annuities (also known as GLWB guaranteed lifetime withdrawal benefit — products). I particularly enjoyed these parts as they had clear and concise explanations on how the vehicles work, when you should buy them, costs, product comparisons and so on.
Some caveats
One substantial caveat for me, however, was that these products require entering into a contract with an insurance company. This raises two kinds of risk: i) the insurer alters the costs or benefits of the contract and ii) the insurer goes out of business
As for the first risk, it is quite real — as we are seeing in the case of life-insurance contracts. First, there was the class-action lawsuitsover vanishing-premium life-insurance polices, and now universal life-insurance policy holders face dramatic hikes to their premiums. For more detail, see this article at Million Dollar Journey blog.
As for the second risk, the book recommends checking the credit rating assigned to an insurer. However, credit-rating agencies dont always get it right as we saw during the subprime-mortgage crisis (and as I have seen over 20 years of observing financial markets). Moreover, annuities and GLWBs involve payouts over 20 to 30 years in many cases: how can anyone assess the creditworthiness of a company 15 to 30 years into the future?
True, even if the insurer goes under, an industry organization Assuris promises to transfer your policy to another insurer while guaranteeing up to $2,000 per month or 85% of the monthly promised insurance benefit (whichever highest). Here, again, one wonders what would happen if solvency concerns became an industry-wide problem and the amount of compensation required became substantial.
Thus, what would have made a convincing book perhaps even more convincing is if it had allocated more space to dealing with these kinds of objections. In particular, one thing I would have appreciated hearing more about was the viability of GLWBs in their present form given the likelihood regulators will raise reserve requirements for them and the financial stress the biggest Canadian provider, Manulife Financial, is currently experiencing largely due to theliabilities they have with holders of its GLWB products.