Who Uses Annuities, Who Doesn't?

With so few Americans having saved enough to see them through retirement, it’s a dilemma for planners and economists alike why people are so unattracted to annuities that can provide a source of income for life.

Indeed, according to a new working paper from the National Bureau of Economic Research, they can be a “valuable component” in retirement funding. But no matter how much economists believe that people should annuitize, “actual demand in the marketplace is low.”

And that’s a big problem, since approximately $9.2 trillion of retirement assets are held in defined contribution plans or IRAs and people are challenged by how quickly or slowly to draw on those assets, lest they run out of money and become impoverished — or, conversely, don’t spend enough and perhaps don’t have as comfortable or healthy a retirement as they could have.

Researchers found that “a relatively high percentage of respondents dislike all annuities.” But demographics don’t predict who will fall in that group, and even factors that appear to be important — such as beneficiaries — have effects that are either small or the opposite of what one might expect.

Such factors as life expectancy, an individual’s perception of fairness, ownership issues, loss aversion in addition to risk aversion and concerns about future health all weigh on an individual’s decision whether to annuitize or not.