Annuities Underutilized by Investors, Study Says

A recent academic study suggests that investors rely too little on annuities, given that annuities can guarantee retirees an income that lasts the rest of their lives, and at a lower cost than it would take to achieve that goal using investment products like stocks and bonds.

Calculate My FREE Annuity Quote Now!



  • Optional: For a 2-person annuity (joint lives)

No agent will call you

Your privacy is guaranteed.
Find advanced calculator options here.

Get quick answers to your annuity questions: Call 800-872-6684 (9-5 EST)

The study, by Professors David Babbel of the Wharton School and Craig Merrill of the Marriott School of Management at Brigham Young University, calculated that people should use roughly 75% of their excess wealth—that is, the wealth they have beyond what they need to provide for their basic needs—to buy annuities, assuming normal stock market volatility and risk premiums and a 10% markup on annuities.

Mr. Babbel said that conclusion contrasts with reports in the financial press suggesting investors should put 25% to 30% of their savings into an annuity.

The study was co-sponsored by the Wharton Financial Institutions Center and New York Life Insurance.

As fewer companies provide workers with defined-benefit pension plans, and as Social Security replaces a smaller portion of workers’ pre-retirement income, there is increased interest in the methods workers should use to draw upon their retirement savings in order to avoid running out of money.

Mr. Babbel and Mr. Merrill argue that annuities are the best method for guaranteeing that retirement income will last as long as the retiree does.

The study notes that life annuities pool longevity risk among all of an insurance company’s annuitants. “To achieve a similar riskless guarantee of income [in another way] throughout one’s uncertain lifetime would cost between 25% and 40% more,” Mr. Babbel and Mr. Merrill wrote.

Testimonial Image
Just bought my first SMA and was very happy to have gone through Immediate Annuities.com. I found them in an article in the Wall Street Journal. As a first time buyer, I had a lot of questions. But to their credit, they did a great job answering my questions directly or getting the right answers from the right people when they needed to.
Allen Boaman
Read 650+ verified reviews

They also noted that income annuities are getting cheaper. While an earlier study found that in 1995, the price markup on annuities sold to retail investors ranged from 6% to 10%, “we find that today, eleven years later, the markups on nominal annuities have dropped to about half those levels, and that fixed real annuities reflect a markup of only 2%,” Mr. Babbel and Mr. Merrill wrote.

Mr. Babbel said the decline in annuity markups reflects both the more rigorous pricing model used in the study and the increased competition among annuity providers.

Source: financialweek.com 08-13-2007

We'd love to hear from you!

Please post your comment or question. It's completely safe – we never publish your email address.

Add a new comment: (Allowed tags: <b><i>)


Comments (0)

There are no comments yet. Do you have any questions?