A Different Perspective on Retirement Income Sustainability: The Blueprint for a Ruin Contingent Life Annuity (RCLA)

Abstract

This article describes a new retirement income insurance product that would help individuals protect against longevity risk and retirement “ruin”in an economically efficient manner. The authors label this product a ruin-contingent life annuity (RCLA), for which they develop various numerical examples and pricing models. They then argue that RCLA products already exist, albeit not on a stand-alone basis. Namely, these RCLA products are embedded within modern variable annuity (VA) policies with guaranteed living income benefit (GLiB) riders. The authors’ analysis thus provides a deeper understanding of the role of VA + GLiB policies in hedging retirement risks. Indeed, the popularity of GLiB riders on VA policies point towards the potential commercial benefit of such stand-alone insurance products. At the very least, the existence of such a market would enable wealth managers to properly value the economic cost of a given retirement spending rate.