Retirees are weathering retirement under “substantial risk and uncertainty” by not choosing a deferred income annuity — a product “that specifically targets longevity risk” and is much loved by economists, according to retirement experts.
In a their paper, Can Annuities Become a Bigger Contributor to Retirement Savings?, written for the Brookings Institution, Martin Baily and Benjamin Harris write that despite their benefits, use of deferred income annuities “has seen close to zero take-up in recent years.”
Academic literature on annuities has analyzed the benefits of deferred income annuities, the paper states.
Such a policy could be purchased at the date of retirement, or earlier by making contributions to a policy during working life. A deferred income annuity policy pays nothing until the person reaches old age, say 80 or 85 years, at which point it pays a fixed amount each month or quarter.
Someone in their 60s or 70s can then plan their expenditures knowing that if they live into their 80s or 90s they will be covered financially by the payout from their annuity policy plus their continuing Social Security benefits, the paper explains.
“Economists have shown that under a range of assumptions about people’s attitudes to risk, a deferred income annuity policy makes people better off,” the paper states.
In economic models, the paper continues, “people are made better off because deferred annuities offer an opportunity to purchase insurance against longevity risk cheaply — allowing retirees to keep much of their portfolio of assets intact for other purposes.”
Deferred income annuities are “cheaper” than immediate income annuities, the paper asserts, “in that the stipend they provide is high relative to the amount they cost for two reasons.”