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The Psychology of Immediate Annuities


People have been studying the psychology of annuities for years because they have the benefits many are looking for, but are not sold in the numbers that it seems they would be.  Annuities offer the same type of benefits and security as the beloved pension, but are not used often by those without the benefit of a defined pension.  In the Investment News article, “Insights into the annuity puzzle,” they look into what behavioral and psychological factors lead people to go against what would seem the rational choice.  Immediate annuities offer guaranteed income for life, so something is keeping a lot of retirees from choosing them.

One problem is that many people just don’t have enough savings in retirement.  Some have no savings at all and others have so little that they have to find another way to fund their retirement by working the rest of their life or changing their lifestyle.  When annuities are readily available as a choice for retirees, they are more likely to be chosen.  What is problematic for the annuity industry is that 401k annuities are not very readily available as an option.  Since it is more difficult for people to go out on their own and research annuities, they are more likely to choose what their plan has to offer.

The smallest differences in wording can make a world of difference in decision making, so those who see the word ‘investment’ rather than something else may not realize the security and guaranteed retirement income that annuities have to offer.  People also have an aversion to loss and worry that the risk of dying right after purchasing their annuity is too great.  It has been shown that losses hurt twice as much as gains feel good.  But research has shown that annuities would benefit most households, whether they combat the risk with a death benefit annuity or not.  The government is working hard to get annuities offered in more 401k plans and increase education about annuities to make sure that Americans have a fully funded retirement option.

Written by Rachel Summit

Follow Rachel Summit on Twitter https://twitter.com/#!/financemama

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