Retirement Income: Risks and Strategies, by Mark Warshawsky

• DOI: http://doi.org/10.1111/jori.12000
• Published date: 01 June 2013
• Date: 01 June 2013

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The Journal of Risk and Insurance, 2013, Vol. 80, No. 2, 491-493

DOI: 10.1111/jori.12000

BOOK REVIEW

Retirement Income: Risks and Strategies, by Mark Warshawsky, 2011, Cambridge, MA:

MIT Press, 280 pp. ISBN: 978-0-26201-693-3.

Reviewer: Estelle James, Professor Emeritus, SUNY Stony Brook and former lead

economist, World Bank; ejames@estellejames.com

Retirement Income: Risks and Strategies contains a collection of previously published

(updated) papers coauthored by Mark Warshawsky and colleagues regarding retire-

ment savings issues, in a context where an increasing proportion of retirementincome

will come from defined contribution plans or personal savings rather than defined

benefit pensions and where public financing of long-term care (LTC) is very limited.

At the same time, relatively few seniors choose to purchase private longevity or LTC

insurance. Various chapters explain why and explorewhat can be done to make such

insurance more attractive.

Retirees face a variety of risks in choosing their investment and payout strategies,

including longevity, volatility, liquidity, inflation, market timing, and survivor risk.

Seniors want their savings to last their entire lifetime at as generous a level as possi-

ble, while avoiding the high volatility that high-return strategies involve as well as

the illiquidity, inflexibility, and inflation dangers that simple annuitization involves.

What kind of payout strategy will protect against longevity risk without increasing

these other risks? Chapters coauthored with Jeffrey Brown and with Tomeka Hill

present a broad introduction to annuities and summarize the potential uses of vari-

able annuities, inflation-indexed annuities, and joint annuities to mitigate inflation,

market timing, and survivor risk. Several chapters coauthored with Gaobo Pang

simulate the effects of alternative investment/payout strategies, using a large num-

ber of 36-year periods based on historical rates of return from 1962 to 2008. While

the best strategy depends on individual preferences, the authors conclude that key

ingredients are likely to include a balanced portfolio of stocks and bonds during

the accumulation stage that is converted into a fixed annuity at retirement—either

partially or fully through gradual laddered purchases. In 2012–2013, interest rates

on bonds (therefore payouts on new annuities) are very low and stock market

volatility is very high relative to historical data. It is not clear whether that will

change the optimal payout strategy for individuals who are close to retirement

now.

One of the major risks that retirees face is the probability that, at some point, they

will require long-term custodial/medical care—in their own home, an assisted living

facility, or a nursing home—thereby sharply increasing their cost of living. Several

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