BlackRock, Harvard: Retirees Don’t Know What They Want, but It Might Be Annuities

As boomers start to retire, they’re confused about whether or not they want annuities—and the confusion stems not from old age but from a fear of losing control, according to results of studies from BlackRock and Harvard University released Thursday at a press briefing in New York.

Retirement income is a growing concern nationwide, but because retirees themselves don’t really know whether they do or don’t want a guaranteed income stream, employee 401(k) plan sponsors may become more responsible for helping people make that choice, the studies conclude.

“I don’t think the U.S. public knows what it wants,” said David Laibson, a Harvard College professor and aging expert with the National Bureau of Economic Research whose research focuses on behavioral economics and human irrationality. “You don’t get a radically different answer when you change the wording of a question about whether you want chocolate or vanilla ice cream, but with annuities you do.”

Retirees were asked whether, knowing what they know now, they would have chosen to receive a steady stream of income, a lump sum, or a mix of both when they retired. The majority, 77%, said they would have chosen a steady stream, while 15% would have picked a mix and 8% would have taken the lump sum. However, when asked if they wanted the flexibility to control their retirement money any way they wanted, 79% said they preferred that control over guaranteeing themselves a secure retirement income.

Cognitive Impairment a Good Argument in Favor of Annuities

The problem is compounded because cognitive function declines for adults, Laibson said. The prevalence of dementia in North America doubles every five years in people ages 60 and older, he noted, adding that cognitive impairment without dementia is an even greater risk.

“These individuals should not be making complicated financial decisions. They need a check that comes regularly that they can deposit into their checking account,” Laibson said, adding that the rollover IRA “is the Wild West of financial products.”

Laibson delivered his remarks as part of BlackRock’s annual retirement briefing, where this year the world’s largest money manager shared the results of a survey of 1,002 employed workers as well as 1,035 “newly minted” retirees, whose average age is 67. Overall, the survey found that retirees who are actually living the experience and receiving income feel more secure than worried workers who fear they will never save enough money to retire.

The majority of retirees, 64%, strongly agree that their financial situation allows “having a choice not to work anymore,” while just 37% of workers strongly expect that their finances will allow such a choice, according to BlackRock’s 2012 survey of retirees and workers.

In addition, retirees report themselves as doing better than current workers expect to do in terms of “buying the things I want after paying for essentials,” at 46% versus 37%, and “easily covering my medical costs,” at 43% versus 28%.