What Lessons, If Any, Can Practitioners Apply From Academic Economists About the Role of Annuities in Post-Retirement Asset Decumulation?
This paper investigates what, if anything, practitioners can learn from the literature modeling how households can use annuities to manage postretirement asset decumulation, and whether that literature reveals a need for innovative annuity products. This paper concludes that a desire to retain exposure to the stock market is not a justification for rejecting annuities since there are existing annuity products that offer equity exposure. Households would be better off purchasing longevity annuities than simply deferring annuitization. Whether longevity annuities are preferable to immediate annuitization depends on the households level of risk aversion and need for liquidity, as well as the relative expense loads of the two products. Although annuities involve a loss of liquidity that may be valuable to households facing uncertain health-care costs, annuitization could nonetheless benefit these households because Medicaid treats annuities more favorably than unannuitized wealth.
The focus of the literature is on immediate and longevity annuities. However, most annuity purchases are of deferred annuities. The role of deferred annuities in retirement wealth decumulation has been under-researched and should be a focus of future research.