The general public is very cool on annuities. But many economists like the idea of retirees using some portion of their savings to buy them.
Annuities, with their fixed monthly payments, may be the best way to ensure retirees’ savings last just as long as they do. Otherwise, they may either spend it too fast and deplete their savings prematurely or spend too conservatively, depriving themselves of necessities in their old age.
New research suggests that one reason retirees don’t buy annuities is because they have great difficulty figuring out what they’re worth. When they try to figure this out, they bump up against their own cognitive limitations – limitations that only worsen with age.
In the study, 2,210 adults over age 18 were asked to estimate the value of a monthly annuity familiar to most workers: Social Security benefits. First, the research subjects were asked if they would pay $20,000 to “buy” a $100 increase in their monthly Social Security benefits. If the person said no, the survey repeated the question with a lower amount, eventually zeroing in on what this additional $100 benefit was worth to them. Next, the research subjects were asked to reduce – or “sell” – their monthly benefits by $100 in return for a specific dollar amount paid to them upfront.
In theory, the buy and sell prices they finally arrived at should be equal. But there was an enormous gap between the two. The median price research subjects were willing to pay was $3,000, and the median price at which they would sell was $13,750. There was also a wide range of sales prices among the individual participants: some would accept $1,500 or less, while others wanted $200,000 or more.
The researchers then showed that the gaps between buy and sell prices – a measure of one’s ability to assess the value of an annuity – were much larger for people with limited cognitive skills and less education. The gaps for people over age 65 were also much larger than the gaps for younger people, reflecting the cognitive decline that occurs with age.
The study confirms that annuities are difficult to value. Most people will buy them only if they’re “an exceptionally good deal,” the study finds, and this impediment to annuitization “is strongest among the least cognitively able.”
Use Hackathons to Go from Zero to Business Impact in a Week
Homer Simpson vs Mr. Burns
7 Ways to Effectively Lead a Team on Different Schedules
6 Things NOT to Do with Gatekeepers
How to Close Skill Gaps During Tech Disruption
How Do YOU Find Happiness at Work?
6 Ways to Marie Kondo Your Sales Process
Estate Planning in Second Marriages
Why Companies Should Focus on Employee Health
Retirement Medical Costs Not So Scary When Seen Yearly
Advisor2 hours ago
Homer Simpson vs Mr. Burns
Insights12 hours ago
Europe: The Good, the Bad and the Ugly
Markets12 hours ago
The Mad March Bounce
Development12 hours ago
Persevering Through Daily Mundane Is the Quickest Path to Success
Markets1 day ago
What’s Causing Investors to Come off of the Sidelines?
Sales Strategy1 day ago
7 Key Components When Selling to the C-Suite
Equities2 days ago
Should We break-up Facebook, Google, Amazon, Apple?
Global2 days ago
Don’t Be Fooled by the Politics of Envy