Is the Annuity Puzzle Really So Puzzling? An Analysis of the Consumer Lifetime Annuitization Decision in a Low Interest Rate World
48 Pages Posted: 18 May 2022
Date Written: May 14, 2022
With interest rates on fixed income investments hovering near historic lows, a growing cadre of retirement researchers has been sounding alarm bells regarding the unprecedented portfolio risk faced by consumers who are approaching retirement or recently retired. Their message is simple, continued low interest rates on bonds - or worse, a prolonged period of rising interest rates (i.e., negative returns on bonds) - paired with an extended bear market in stocks could produce a nightmarish sequence of return scenario for retirement spending portfolios the likes of which we have never seen. With conditions seemingly ripe for such a “perfect storm” to develop, some of these researchers have suggested that consumers may do well to eschew traditional portfolio management in favor of transferring some or all of their savings to an insurance company in return for a guaranteed lifetime stream of annuity payments. This paper seeks to assess the wisdom of this guidance by quantifying the potential tradeoff consumers who purchase single premium immediate annuities (SPIAs) may make if such a worst-case scenario does not materialize and by assessing the current state of portfolio sustainability research. We conclude that consumers retiring in their sixties should be less sanguine on the benefits of SPIAs relative to traditional portfolio management.
Keywords: Annuity, Retirement Income Sustainability, Retirement Portfolio
JEL Classification: G11, G22, G29
Suggested Citation: Suggested Citation