September 20, 2020

Annuitizing wealth closes retiree income gap, study says

Jonathan Chevreau Nov 21, 2011 – 12:16 PM ET |

Retirees may have more sources of income than first meets the eye, according to a report out Monday from Statistics Canada. Taken at face value, the report seems to suggest the retirement income crisis is a tad overblown.

The report – entitled Income Adequacy in Retirement: Accounting for the Annuitized Value of Wealth in Canada — seeks to demonstrate that annual income for retirees could be almost as high as it was in their working years.

To get to that conclusion, the authors suggest home-owners benefit from “imputed rent” and that homes can also generate income in old age via reverse mortgages. Similarly, it suggests non-registered investments and business assets could be liquidated, with the proceeds used to purchase annuities that provide a lifetime income.

It says the picture improves even more when comparisons are made after-tax. It even comes up with one scenario in which income generated by such sources is 5% higher for households headed by 65 to 74-year olds than it is for those headed by 45-to-64 year olds.

“The result that consistently emerges is that retirement-age households, on average, have saved enough to maintain a relatively constant income stream,” the authors write, “Moreover, once taxes are taken into account, they appear to have a small cushion.”

But before you breathe a sigh of relief and conclude you can start spending and stop saving for retirement, consider what the experts say:

Prof. Milevsky gives report a C+ for relying on 12-year old data

First, as York University finance professor Moshe Milevsky points out, the report’s calculations rely on data from 1999.
Milevsky, author of Pensionize Your Nest Egg, says:

I’m stunned that they can analyze 12 year-old data and use it to say anything about today’s environment …unless this is being published in the Journal of Historical Personal Finance. Their main claim is that “seniors are richer than they think” because they can hold a garage sale and theoretically liquidate everything they have in their attic, in order to finance their retirement consumption. Perhaps the next step is to start counting adult children — who can take care of you, instead of moving into a nursing home or assisted living facility — and consider that an asset as well?

.If this were a graduate student paper, Milevsky says he’d give it a C+. “Their annuity formula isn’t correct, since it ignored anything after life expectancy. They assumed everyone dies at life expectancy and they ignore longevity risk. This bias leads to a high imputed consumption level.”

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