You want to know how to sell more annuities? You do it by selling less of them. At least that's the way it sounds if you read a new study about to be published in the Journal of Public Economics.
Here's the deal. For some reason, those fellows in ivy-covered halls seem to think it's in the mathematically calculated best interests of retirees to annuitize their savings rather than take a single lump-sum payment. In real life, the vast majority of retirees – assuming they even have the option to annuitize – would rather go through the headaches associated with a considerable amount of paperwork just to avoid annuitization. Government regulators believe this lack of adoration for annuities is a problem.
A normal person might say this behavior signals a rather stark dearth of enthusiasm for annuities. Apparently, a vast majority of retirees have neglected to determine their mathematically calculated best interests. Researchers call this the "Annuity Puzzle." Much like Modern Portfolio Theory's "Equity Premium Puzzle," the Annuity Puzzle has perplexed finance professors for some time.
Recommended For You
Personally, I don't go in for these academic puzzles. Could the real problem be found in the underlying assumptions required by the equations the academic elites trust so much? Maybe the real answer can be found in the "irrational" actions of individuals. I used the term "irrational" to poke fun at those who have such a vested interest in efficient markets and the rational man hypothesis. If people behave irrationally, they do so in a rational way.
Take annuities as an example. People don't want to annuitize their retirement savings because they fear they may need more money sooner than those annuities can provide. In other words, a bird in the hand is worth two in the bush. Who could blame retirees for wanting to see the cash up front rather than the promise of more cash in the future? Such is the dilemma of the "all-or-nothing" option offered those about to embark on their retirement.
Research shows, when given a hypothetical "all-or-nothing" option between taking an annuity or receiving a lump-sum payout, retirees are split right down the middle. Half choose to annuitize. Half choose the lump sum. In reality, up to 75 percent choose the lump sum. But let's stay in the hypothetical world. When given the theoretical option to partially annuitize, four out of every five people will select some form of annuitization.
Think about what that means. In the all-or-nothing option, 50 percent of the people take their full savings in a lump-sum. Given the partial option, only 20 percent take the full lump sum. But here's the kicker. In the all-or-nothing option, 50 percent took the full annuitization option. Yet, in the case of the partial option, only 21 percent took full annuitization. The remaining 29 percent only partially annuitized.
If one of the biggest hurdles to annuitization is the lack of ready cash, the partial option allows those who fear that hurdle to both feel comfortable with the available of having cash in their hand and, at the same time, enjoy whatever benefits annuities have to offer.
This is an important lesson for both government regulators who seem bent on encouraging retirees to annuities and those who sell annuities. If you want more people to buy annuities, avoid giving them the all-or-nothing option. Give them the option to partially annuitize.
Only by being willing to sell fewer annuities will we see more people buy annuities.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
