Disengagement: A Partial Solution to the Annuity Puzzle
38 Pages Posted: 4 Apr 2013
Date Written: March 20, 2013
This research studies whether individuals make choices consistent with expected utility maximization in allocating wealth between a lifetime annuity and a phased withdrawal account at retirement. The paper describes the construction and administration of a discrete choice experiment to 854 respondents approaching retirement. The experiment finds overall rates of inconsistency with the predictions of the standard CRRA utility model of roughly 50%, and variation in consistency rates depending on the characteristics of the respondents. Individuals with poor numeracy and with low engagement with the choice task, as measured by scores on a task-specific recall quiz, are more likely to increase allocations to the phased withdrawal as the risk of exhausting it increases. Individuals with higher scores on tests of financial capability and with knowledge of retirement income products are more likely to score high on the engagement measure, but capability and knowledge do not have independent effects on consistent choice rates. Results suggest that initiatives to improve specific product knowledge and to help individuals engage with decumulation decisions could be a partial solution to the annuity puzzle.
Keywords: discrete choice, retirement incomes, household nance, annuities, financial literacy
JEL Classification: G23, G28, D14
Suggested Citation: Suggested Citation