Despite the myriad benefits of annuities — they reduce the risk of outliving assets, they can provide a steady income stream during retirement and, in the case of fixed indexed annuities (FIAs), they represent an investment with upside potential and no risk of losing the initial principal — very few retirees and pre-retirees choose to annuitize a substantial portion of their retirement savings, according to an article, “Annuitization Puzzles,” in the Journal of Economic Perspectives.
“Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one’s income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth,” the article reported.
Given all the positive attributes of annuities, economists have wondered for decades why annuities aren’t as popular as they could be. Studies point to several reasons why those nearing or at retirement age aren’t entering into annuity contracts, including low retirement savings, unfair annuity pricing, decreased flexibility in accessing the money invested in annuities, the inability of annuity owners to pass on their assets and the possibility the financial company issuing the annuity will default. Annuity providers have addressed consumers’ concerns by modifying their products. However, although some annuities like FIAs now offer low-risk, fixed terms and options for guaranteed income, annuities still aren’t selling like hotcakes.
It turns out that pre-retirees and retirees not only have practical concerns about purchasing an annuity, they are deterred by other, less concrete reasons. A new study by Linda Court Salisbury and Gergana Nenkov, professors at Boston College’s Carroll School of Management, looks at behavioral explanations for consumers’ hesitance to annuitize a significant portion of retirement savings.
According to the study, “Solving the Annuity Puzzle: The Role of Mortality Salience in Retirement Savings Decumulation Decisions,” the one big reason more people aren’t buying annuities is mortality salience — the increased awareness of death-related thoughts.
“The task of choosing an annuity increases mortality salience by forcing people to consider their own death and motivates consumers to escape thinking about their mortality by avoiding the annuity option,” according to the study.
“When you think about an annuity, you have to think about how long you have left to live, how many years you need to finance,” Nenkov said in a Boston College announcement of the study. “You have to think about dying — that’s part of the annuity process, and when people do that, it turns them away.” If the individual doesn’t have to think about annuities, he or she doesn’t have to think about death.
“People need to think about how long they expect to live in order to calculate the potential payout for an annuity,” Salisbury noted.
The study tried to understand not only what was keeping people from buying into annuities, but also how to help people overcome their avoidance of annuity products.
“Our findings suggest there may be simple ways financial planners can reduce thoughts about death in these situations,” Salisbury said. “There may also be strategies to help people cope with the anxiety that these thoughts might evoke.”
Even simple changes can make a difference. In the study, Salisbury and Nenkov experimented with the text in annuity brochures to see if individuals responded differently to different wordings. More people chose annuities when they read that they would receive monthly payouts “each year you live,” than “each year until you die.”
So while advisors can’t alleviate the anxiety clients feel about their demise, they can alter their approach to de-emphasize death and dying when they’re promoting annuities — and will likely find their clients are more receptive to their message.