It's not just that retirees dislike annuities; it's that they go out of their way to act on that dislike. For example, a study in the Journal of Public Education says that even when annuity is the default provision, people will go out of their way to fill out more paperwork to receive a lump sum payment that they would then have to invest themselves. That says a lot. In fact, only 10 percent of the people leaving their job after 65 pick the annuity option. Finance professors, who feel it is in the retiree's best interest to choose an annuity, call this gap in behavior the “annuity puzzle.”
The study explains some of the reasons behind this “annuity puzzle.” For example, people are less likely to choose an annuity option if they own a home, have kids and have a higher net worth. On the other hand, the study's researcher found that retirees who are married and who have been shown mortality tables are more likely to purchase an annuity.
The biggest detriment to selling annuities, though, is how the sale is framed to the prospective buyer. Upon retirement, the most likely offer will be to either completely annuitize or not. When presented with this “all or nothing option,” the study showed about half chose to annuitize. When given the choice to partially annuitize, the number choosing an annuity option jumped to 80 percent. Significantly, only 21 percent of the people opted for full annuitization. This suggests an “all-or-nothing” scenario; more than half the people who selected to fully annuitize do so begrudgingly.
That's probably why these survey numbers seem much more favorable toward annuities than real world experience might suggest. Indeed, one of the authors of the paper told me that even if the companies don't offer partial annuities, retiring employees are free to buy them in the open market. We don't see evidence of this happening, though.
The authors of the paper suggest annuity providers create products “that give beneficiaries more flexibility and control.” For example, annuities that feature a cost of living adjustment and an annual “bonus” option (for unexpected large sum expenses) might make annuities more attractive. With flexibility, however, comes complexity. In either case, there's no guarantee consumers will even buy these enhanced annuities.
There may be a common sense behavioral answer for this. It could be that people aren't willing to tie up large sums of money early in retirement. Perhaps they aren't comfortable predicting they won't unexpectedly need a pile of money for some unforeseen event in the near future. Remember, these folks just walked away from the most steady stream of income they've ever had.
There are a lot of unknowns for new retirees. Why add to them by purchasing an annuity—even a partial one?
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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).
