It’s long been a mystery to economists: As MONEY has often noted, an immediate annuity is a great way to ensure you never run out of money in retirement; for a fixed sum upfront, you collect a monthly check for as long as you live.
So why do few people buy one? This disconnect, dubbed the annuity puzzle, has led regulators to try to add annuities to 401(k)s to encourage savers to buy them.
Turns out, savers had it right all along, even if they didn’t know why (a fear of dying young is what deters most). Almost half of retirees are better off keeping their portfolios liquid, not locked up in annuities, according to new research by Felix Reichling of the Congressional Budget Office and Kent Smetters of the Wharton School of Business.
The chief reason: the potentially high cost of health care. “One of the largest risks facing most retirees is running up hefty medical or long-term-care expenses that aren’t covered by insurance,” says Smetters.
Tying up too much cash in an annuity can produce a double whammy. A health crisis may cut your lifespan, which reduces the future value of your remaining annuity payments. Meanwhile, you need cash to pay for your care.
To read the full article click here