Annuities Could Help the Service Industry: Idea File

Policymakers in Washington might be able to give restaurants, theaters, cruise lines and hotels a post-pandemic boosts by promoting more use of annuities.

Michael Finke, professor of wealth management at the American College of Financial Services, talked about the relationship between annuities and pleasure in a recent interview.

Finke worked with Chris Browning and other researchers on “Spending in Retirement: Determining the Consumption Gap,” a widely cited paper about how retirees spend their money.

The researchers found that many retirees lack adequate retirement savings and are in danger of running out of money in retirement.

But the researchers discovered something surprising about the kinds of retirees financial professionals serve, who typically do have adequate savings: Those well-prepared retirees suffered from a consumption gap.

Retirees who had enough savings, but no retirement income annuity or defined benefit pension, spent much less than a hard-nosed financial advisor would have recommended.

For households with more wealth but no longevity protection, the consumption gap amounted to 53% of the recommended level of spending.

Finke said in the interview that the size of the consumption gap varied with the age of the retiree.

“A lot of retirees don’t spend enough in their late 60s and early 70s,” he said.

The consumption gap problem affected spending on eating out, traveling and other enjoyable experiences much more than it affected spending on housing, utilities and other necessities, he added.

When well-prepared retirees had an insured source of retirement income, they spent more early in retirement.

“They also tended to spend more on things that are fun,” Finke said. “If you know you’re not going to run out of income, you might be more comfortable spending money on dinner and a show.”

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