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book review

Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income for Life

Moshe Milevsky and Alexandra Macqueen

Wiley; September, 2010; paper; $26.95

The discovery

Having a large nest egg in retirement is very different than having monthly income.

The questions

Why is it not enough to simply save a lot for retirement?

Extensive psychological studies show that people with enough income are happier than people with a lot of money. When you have a lot of money but you haven't transformed it into an income stream that you can rely on, you worry about whether you'll have enough.

How do you create a sufficient income stream?

It's more complicated than simply buying an annuity. To pensionize your nest egg, you determine the gap between the income that you need in retirement and the income that you already have that's pensionized. If you need $50,000 [a year]and you're going to receive $30,000, you can close that gap using different instruments. You can keep some of your funds in a traditional stock and bond account, or allocate some to an annuity or to a guaranteed minimum withdrawal benefit product.

Aren't there risks to transforming your nest egg into income?

If you simply allocate your nest egg to an annuity, the obvious downside is that after you die there is nothing left. Also, if you buy an annuity all at once, you're subject to the interest rate and other factors at that time. So you've made a decision at a single point in time that may not be the optimal decision as your life progresses, but it's an irreversible decision.

What is the most surprising thing in this book?

People think about stock market risk. But longevity is actually riskier than the stock market. If you plot longevity in the same way you plot stock market returns, the volatility on longevity is very high. You have a chance of living only a few years in retirement or you have a chance of living many years in retirement and you can't predict in advance where you'll fall. That's why you don't want to dedicate all your assets to any one particular product. The different products protect against risk in different ways. If it all goes to an annuity and you die at 67, that's not the optimal strategy.

Why we should trust her

Alexandra Macqueen has worked as a licensed investment adviser for nearly two decades. Her co-author is Moshe Milevsky, a finance professor and the bestselling author of several books on money and investing. Ms. Macqueen studied Latin recreationally throughout her 20s and still whiles away idle moments attempting ad hoc translations. Her favourite book is Moby-Dick.

This interview has been condensed and edited.

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