Economists Say YES to Annuities

Economists Say YES to Annuities

March 2, 2015 -With Superbowl XLIX recently concluded, if you played for the New England Patriots, CONGRATULATIONS! 

Earning a Superbowl ring puts you in very elite company.

With the 87th Academy Awards now behind us, if you were among the select few to take home an Oscar, CONGRATULATIONS! 

You own a rare piece of hardware.

If you’ve made the decision to use a portion of your retirement savings to purchase annuities, CONGRATULATIONS! 

A host of prominent economists, including several Nobel Prize winners, agree you have made a smart retirement choice.

You are definitely ahead of the curve! (Pun intended)

Smart Folks Here

While it’s a safe bet that fewer people read American Economic Review than watch the Superbowl or the Oscars, those who did read one particular article from about a decade ago derive something far more important than the fleeting entertainment value the first two diversions bring.

Say YES to AnnuitiesThey gain valuable knowledge which can lead them to a more secure future.

Using formulae and language only a calculus student could love, “Annuities and Individual Welfare” demonstrates that economists, who rarely agree on anything, all seem to agree that annuities make the most sense for most people.

Period!

And lest you think this is a bunch of life company propaganda, consider the collective brain power coming together to agree “annuitization of a substantial portion of retirement wealth is the way to go.”

Those holding this belief are economists from some of the world’s most prestigious centers of higher learning, including:

The Wharton School, Berkeley, Chicago,

Yale, Harvard, London Business School, Illinois,

Hebrew University, Carnegie Mellon, MIT

Reluctance to Jump In

Most of us intuitively understand the retirement wealth accumulation process: Save money. Invest it. Hope it grows.

But when it comes time for Decumulation, people just can’t seem to make the shift from a lifetime habit of acquiring to one of “dequiring.”

Those who can make this transition will benefit greatly.

In their article “Investing your Lump Sum at Retirement,” Wharton Financial Institutions Center Fellows Babbel and Merril reinforce the finding that:

” . . . full annuitization was optimal for people who had no desire to leave a bequest to their heirs or charitable organizations.

It also concluded that for those with bequest motives, substantial annuitization of retirement wealth was still the most prudent way to act.” (Emphasis ours)

Ironically, those with the greatest wealth are the ones who stand to benefit the most from annuitization.

Not because they have the most wealth to begin with but rather because their percentage of assets dedicated to guaranteed lifetime income cash flows (i.e. Social Security) is much smaller.

When the Chairman of the Federal Reserve discloses, as Ben Bernanke did in 2010, that the bulk of his retirement portfolio consists mostly of two annuities, it’s definitely noteworthy.

If the person overseeing the entire central banking system of the United States chooses such a no-frills retirement allocation, maybe it can serve as a clue to the rest of us that annuities are a pretty smart, safe bet.

So why not join the chorus?

“Say YES to annuities!”

Image courtesy of digitlart at FreeDigitalPhotos.net

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