The Annuity Puzzle: Other Issues Impacting The Annuity Decision
June 9, 2020 by Wade Pfau
This discussion has been fairly positive with regard to the role of income annuities as a retirement income tool. My explanations follow standard academic theory regarding income annuities and their role in pooling longevity risk and providing mortality credits. Without this risk pooling, retirees must be needlessly conservative in their spending to ensure they still have something left if they live well beyond their life expectancy.
For this reason, economists have long wondered why people do not make greater use of income annuities as retirement income tools. Often cited in connection with this bafflement are Menahem Yaari’s research from 1965 about spending for an uncertain lifetime, and Franco Modigliani’s Nobel Prize acceptance speech addressing the subject in 1985.