A different perspective on retirement income sustainability: the blueprint for a ruin contingent life annuity (RCLA)

TL;DR

This paper introduces the ruin-contingent life annuity (RCLA), a new retirement income product designed to protect against longevity risk, and discusses its integration within variable annuities with guaranteed income benefits.

Contribution

It proposes a novel stand-alone retirement product, RCLA, and highlights its existing embedded form within variable annuities with GLiB riders.

Findings

RCLA effectively mitigates longevity risk in retirement planning.

Embedded RCLA features are already present in current variable annuity products.

Numerical examples demonstrate the viability and pricing of RCLA.

Abstract

The purpose of this article is twofold. First, we motivate the need for a new type of stand-alone retirement income insurance product that would help individuals protect against personal longevity risk and possible "retirement ruin" in an economically efficient manner. We label this product a ruin-contingent life annuity (RCLA), which we elaborate-on and explain with various numerical examples and a basic pricing model. Second, we argue that with the proper perspective a similar product actually exists, albeit not available on a stand-alone basis. Namely, they are fused and embedded within modern variable annuity (VA) policies with guaranteed living income benefit (GLiB) riders. Indeed, the popularity of GLiB riders on VA policies point towards the potential commercial success of such a stand-alone vehicle.