Immediate Annuities – Who Wants Them?

A new report fills in another piece of the so-called “annuity puzzle.”

In retirement plans, one of the more intransigent concerns for policy makers, providers, advisors and plan sponsors alike is what has been called the “annuity puzzle” – the reluctance of American workers to embrace annuities as a distribution option for their retirement savings.

The analysis by the nonpartisan Employee Benefit Research Institute (EBRI) finds that those with the least – and the most – assets are more likely to buy annuities than people in the middle of the savings distribution. Moreover, the report found that savings had a large positive effect on preference for annuities – though only for those in the highest savings category.

EBRI’s results also show what was described as a clear preference for annuitizing smaller shares of assets or partial annuitization. When compared to their current financial situation, only 16.5% of retirees (ages 65 and above) preferred full annuitization compared to 43.0% who preferred a one-quarter annuitization.

To arrive at those conclusions EBRI used what it termed a “unique experiment” in the Health and Retirement Study (HRS) to assess the effect of savings on the preference for immediate annuities, those that begin paying out a regular stream of income as soon as they are purchased.

The researchers said that possible explanations for those preferences could be:

  • Those at the bottom of the savings distribution are very likely to run out of money in retirement (and expect to) and thus are inclined to select annuities.
  • Those at the top end of the savings distribution expect longer lifespans and can afford annuities even after leaving a financial legacy for their heirs.
  • As for those in the middle – the report notes that they generally face more uncertainty about their retirement adequacy and so they are more likely to hold on to their savings for precautionary purposes. Additionally, they may have an interest in leaving a financial legacy for their heirs.

It is probably worth noting that these conclusions were based on individual responses to a hypothetical situation, not actual observed behavior.

Previous EBRI analysis has shown that, at least with defined benefit plan structures, to a large extent, plan design drives annuitization decisions.

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