Comments and Observations of the Boston College Study ‘How Can We Realize the Value That Annuities Offer in a 401(k) World?’

A favorite go-to resource of mine, the Center for Retirement Research at Boston College website, published a white paper by Steven A. Sass in July 2016 that reported the findings of a study about the impact of implementing an annuity strategy. I was intrigued and thought I’d share.

The brief’s key findings are:

  • A growing number of people are entering retirement with more 401(k) savings and less annuity income from Social Security and traditional pensions.
  • Annuities assure a lifelong income stream and — compared to other draw-down options — can provide attractive payouts, which can help cover late-life health costs.
  • But few individuals buy annuities, partly due to behavioral barriers such as the complexity of valuing the product and the way that draw-down options are framed.
  • Options for overcoming these barriers include:
    • Educating individuals to focus more on the income they can draw from their nest egg, rather than its size; and
    • Automatically putting a portion of 401(k) assets in an annuity, perhaps an Advanced Life Deferred Annuity that kicks in later in retirement (Trustees of Boston College, Center for Retirement Research, 2016, Briefs).

Annuities can be controversial yet just about every American will enjoy the benefits of one during their lifetime. 

Excuse me?

Social Security and most pensions are annuities. You contribute money into an account (the Social Security Trust Fund, for example) and then at some point in your life (it’s called retirement), you start taking a lifetime distribution. It’s a pretty simple and effective way to keep the paycheck coming.

The whitepaper also addresses the issue of consumer aversion to purchasing an annuity. The author, Mr. Sass, is an economist and endorses (in most cases) having an annuity as part of an overall plan. A bias called “loss aversion” plays a part he observed. The “breakeven” point (when do I win and “they” lose) is a strong consideration when deciding on whether to purchase an annuity or not.

I believe Mr. Sass and his associates are barking up the right tree. I’ve seen annuities in action. They’re boring and predictable, and with a guaranteed lifetime income stream annuity, there’s no financial drama. Not a bad complement to your Social Security check.

If you’d like to read the complete article, click here.