Believe it or not it comes from Lifetime Annuities…the obvious catch is that you need to survive beyond your life expectancy. In Australia, this product type has been totally out of favour since the government reduced social security benefits associated with them a few years back but perhaps this is an overreaction and their true value has been forgotten.
I’ll quote an extreme example from the Canadian academic, Moshe Milevsky.
Lets suppose five 95 year olds place $100 each into a term deposit, paying 6%, and after 1 year the $530 ($500 + 6% interest) is split between the survivors. Now apparently the probability of a 95 year old surviving one year is 80% which means we expect there to be four survivors splitting $530 between them or $132.50 each. That is a return of 32.5% comprising of 6% interest plus 26.5% in mortality credits.
Now a lifetime annuity does not actually allow you to cash out at the end of 1 year or any term for that matter. But, the above example still shows you how a return can be enhanced by a long life thanks to others invested int he product dying earlier. For those who live a long long time it is highly unlikely the returns on any sharemarket portfolio will outperform the lifetime annuity. So, for the retired with excellent health and a family history of long life, perhaps the lifetime annuity should be a serious consideration for part of the retirement investment portfolio.
Please note…my remuneration has absolutely no connection with the sale of lifetime annuities. In fact my employer would probably hate this article!!!
I just had a meeting with Charlie Lanchester, who manages half of Perpetual’s massive Industrial Share Fund, and his views on the Australian economy were far more dire than many commentators are saying. Like many, he believes that commodity prices are very high and showing signs of faultering (doesn’t mean they going to crash just beware) and also like many, the Australian residential housing prices are in some trouble (once again not that they’ll crash but that there’s cause for concern). Now whilst, many commentators (including me) agree with these views, Charlie (like me) is of the belief that the Reserve bank is not likely to (or should not) increase interest rates in the short term and that there is a reasonable probability that interest rates could be lower in 12 months time, such is the weakness in the underlying Australian economy. If the Reserve Bank increases rates Charlie believes this could be potentially disastrous for the Australian housing market and we can all extrapolate on the potential effects of that.
It is amazing that economists of the bigger banks are suggesting rate hikes, particularly given they are more likely to suffer the consequences of a housing market decline. Either way, Charlie believes that the real sufferers of a housing market decline are likely to be companies in the consumer discretionary sector and as we’ve seen in recent days, some of the bigger players in property securities, like Westfield, Mirvac and Co.
As mentioned in earlier posts, Australian investors are facing some big risks…
- very very high commodity prices (for when they crash they really crash)
- record high residential property prices (that have effectively propped up this ecoomy through the GFC)
- China needing to slow and contain inflation
- a Euro Sovereign crisis that could always overflow into global financial markets
- record high AUD that is contributing to our two speed economy and preventing foreign investment
Our markets are mostly financial services and commodities (plus a fair share of property) so when investing ensure these risks are considered in full.
