(FEDWeek) - A study has confirmed the longstanding general view that expectations of longevity play a key role in an individual’s decision on whether to purchase an annuity with savings, but that the related factor of optimism vs. pessimism about one’s future also plays a role.
The Center for Retirement Research looked into what is called in the financial industry the “annuity puzzle”—that rates of purchasing annuities are lower than would be expected given their potential for paying off more than the individual put in. That low take-up rate has proven true in the context of the federal TSP program as well, where the annuity purchase option is by far the least-used of the withdrawal option for those who separate from government for retirement or other reasons.
The study said that factors include reluctance to turn over what often is a large sum of money to the provider while not being sure how much will be paid out in return, given the uncertainty of one’s own length of life from that point on. In that context, it said, there is an importance between objective vs. subjective life expectancy, since payouts rates are based on life expectancy statistics;
“Evidence from multiple studies suggests that individuals in their 50s and 60s underestimate their life expectancies. Such pessimism makes them underestimate the years they have to live and therefor their lifetime payouts from an annuity,” it said.
For example, it said, those between ages 55 and 59 on average underestimate their future life expectancy by about 1.6 years, compared with actual statistics, while those 60-65 on average under-estimate it by about 1.2 years. That pattern held true regardless of educational level and race, while women tended to under-estimate their life expectancy by slightly more than did men.
It added: “Pessimism about life expectancy may be correlated with pessimism about other variables that affect annuity purchase. These variables include pessimism about medical expenditures and pessimism about market risk.”