License to Spend: Withdrawal Behaviors With and Without Explicit Longevity Protection
Depleting savings in retirement is often worrisome given idiosyncratic longevity risk and uncertain market returns. Allocating savings to a strategy that provides some type of longevity protection, such as an annuity, can increase the comfort of accessing retirement savings, thereby increase spending in retirement. Recent research by Blanchett and Finke (2024) demonstrates that retirees who have a higher share of their overall wealth in assets that provide guaranteed lifetime income spend more in retirement, making them more able to achieve their lifestyle goals.
This research explores withdrawal activity from a data set of 44,344 annuities sold from January 2018 to February 2021 where annuitants have a choice whether to include a living benefit with the policy. Unlike traditional annuitization requiring an irrevocable election, such as purchasing a single premium immediate annuity (SPIA), a living benefit overlays an account balance (typically within an annuity); for an additional fee, a minimum income benefit is guaranteed even if the account balance is completely depleted assuming certain provisions are met.
Annuities that have a living benefit have significantly more withdrawals, especially at older ages and among those with higher initial purchase balances. When focusing on nonqualified accounts, which are not subject to requirement minimum distributions (RMDs), annuitants who are approximately 65 years old were twice as likely to take a withdrawal within three years following purchase when they have a living benefit and those who were approximately 80 were six times as likely. On an absolute basis, the probability of taking a withdrawal from a nonqualified annuity with a living benefit within three years of purchase is approximately 20% and 40% at ages 65 and 80, respectively, while the probability of withdrawal is only around 10% and 7%, respectively, when there is no living benefit.