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.
