What Can Scholarly Research Tell Us About Cognitive and Behavioral Impediments to Annuitization? Do These Impediments Vary With Race/Ethnicity and Gender?
This essay surveys the scholarly research on behavioral and cognitive barriers to annuitization, suggests ways in which financial advisors and plan sponsors could apply the research to obtain better household financial outcomes, and proposes directions for future research.
Annuities provide households with insurance against the risk of outliving their wealth. Theoretical calculations show that this longevity insurance is so valuable that even households with shorter-than-average life expectancies would benefit by annuitizing at least part of their wealth (Gong and Webb 2008). However, few households voluntarily annuitize any of their 401(k)/IRA assets. Although some researchers have attempted to explain this annuity puzzle by proposing specifications of household preferences that put greater weight on a bequest motive or health-care cost risk, among other criteria, many other researchers consider that behavioral and cognitive biases play an important role in explaining low annuitization rates.