Michelle Richter on the Future (and Present) of CDAs

Can they become a $100B Industry? We sure think so!

Michelle Richter, executive director of the Institutional Retirement Income Council, recently wrote a pair of articles for Advisor Perspectives on contingent deferred annuities entitled “Guaranteed Income for Life.” In the first article, “Can Contingent Deferred Annuities Become a $100B Industry?” Richter examines why Americans don’t buy more annuities, and theorizes that it may have something to do with the permanent commitment required by many annuities:

SPIAs may not be more popular because annuitizing an annuity, which includes the act of purchasing a SPIA, is a more permanent life decision than is the most mainstream decision we think of culturally as permanent – that is, marriage. Few of us would enter marriage with the intention to commute (divorce), yet sadly, 50% of American couples ultimately do divorce. This option to divorce is legally available to married couples, and this option has value to it whether it is exercised or not. While most annuitized annuities do have some liquidity options, few if any allow full commutation…

She goes on to introduce Dr. Moshe Milevsky’s book, Retirement Income Recipes in R: From Ruin Probabilities to Intelligent Drawdowns (Use R!), and the type of annuity he presents in his book: an annuity known now as the contingent deferred annuity.

In the second article, “What is a Contingent Deferred Annuity?” Richter goes into the details of the CDA, both as described by Dr. Milevsky and as they exist today.

Because the up-front capital commitment of a CDA is so much less than for a SPIA, the purchaser’s perceived subjective survival probability does not need to be much greater than average to pay off or allow for their exit from the product and process. This in turn allows the insurer to offer more affordable pricing to protect against ruin risk. This relative affordability for CDA as compared to SPIAs is particularly pronounced in the current low-rate environment.

Richter’s pair of articles are a good, thorough read on just what makes CDAs so special, and why they might be exactly what people need to help combat the current retirement crisis.