Tuesday, July 24, 2012

Deciphering the Annuity Puzzle

My Advisor Perspectives column for July is now available. It is, "Deciphering the Annuity Puzzle: Practical Guidance for Advisors." In this column, I explain the economic theory behind the puzzle. The puzzling issue is why people do not annuitize more of their assets at retirement since it removes longevity risk from the equation and allows for higher lifetime spending power. I also describe in more detail about the idea that people who do not annuitize should plan to reduce spending to some extent over their lifetime to account for their decreasing survival probabilities as they age. Then I provide various explanations for why the lack of annuitization may not be as puzzling as the basic model shows. Finally, I consider a few ways to help get over the behavioral stumbling blocks against annuitization.