The Annuity Puzzle

Why does human nature permit an individual to choose Option A over Option B even when overwhelming evidence assures even the most casual observer that Option B is the superior choice?

Ever chosen unwisely when dating?  Marrying?  Buying a car, a house or a stock?  Ever fail to follow a doctor’s advice?  Ever skip taking vitamins you know are good for you?

As a follow-up to our last newsletter, A Paycheck for Life, which focused on the value of income annuities as part of an overall retirement plan, the New York Times recently featured an article that delved even deeper into this particular quandary.

Entitled The Annuity Puzzle, the article contrasts the retirement choices of two twin retirees with identical net worth.

One retiree has a pension that provides lifetime monthly income.  He is very happy with his situation and has the peace of mind knowing he can never outlive his money.

The other retiree, whose money accumulated in a 401(k) over the years, could easily buy the same happiness and peace of mind by purchasing an annuity to meet his lifetime income needs.  But he balks.  As a result, he is less happy and has less peace of mind than his sibling.

Hence the article’s title, The Annuity Puzzle.

Much the same way people refuse to take vitamins even when they admit to their many benefits, fewer people buy annuities than could benefit from them.

This particular theme is one we continue to study and feel similar perplexity over.  In October of 2009, we wrote about the value of life annuities in our newsletter/blog entitled Live Longer – Buy Annuities which features an interesting mix of scholarly research and coincidental statistics leading readers to the conclusion that annuities are good for you.

In fact, the more we study the always-emerging academic research on this topic, the more we become convinced that the happiest retirees are going to be those who can sleep well at night knowing they’ve secured their future with life annuities.

So take your financial vitamins!  You’ll sleep better at night and, if statistics are accurate, you’ll live longer as a result.