Annuities Reduce Retirees’ Financial Stress, Academic Paper Finds

Annuities provide guaranteed payments that could, in turn, reduce retirees’ financial stress and potentially lengthen life spans, according to a recent study published by the National Bureau of Economic Research. Looking at administrative payout data from approximately 600,000 Chilean retirees from 2004 through 2022, the study found that surveyed retirees with annuities had a 2.55% reduction in mortality over a five-year horizon and a 3.62% reduction over a 10-year horizon.

The study acknowledged that the impact of annuities on a population of retirees is often skewed by adverse selection, which can affect results because annuity purchasers already anticipate longevity. To find a broader population sample, researchers focused on Chile, where approximately two-thirds of retirees choose annuities. At retirement age, Chilean workers use a national exchange to choose between receiving constant, inflation-adjusted annuity payments and phased withdrawals that vary with market results and decrease as the retiree ages.

The authors—Borja Larrain of the Pontifical Catholic University of Chile, Alessandro Previtero of Indiana University’s Kelley School of Business and NBER, and Felipe Severino of Dartmouth College’s Tuck School of Business—noted that demand for Chilean annuities increased as stock returns decreased, rather than choices being made due to concerns about running out of money. In particular, the Chilean annuity adoption rate increased to a peak of 86% in January 2009, during the Great Recession, from 51% in early 2007.

On average, the Chilean annuitants retired at age 63. Of the 8% of the sample population that died during the research period, the average age of death was 68.6 years, higher than the national life expectancy of less than 65 years. Based on measuring the reduction of mortality, researchers found annuitants had an advantage during economic volatility over retirees using phased withdrawals tied to market performance.

Examining results from a Chilean survey on health investments, the researchers also learned that annuitants were more likely to have improved healthcare than those without annuities. For example, those with annuities were 57.8 percentage points more likely to have had a health examination in the past year. They also reported fewer disabilities than retirees without annuities, by 1.5 standard deviations.

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The findings parallel unrelated prior research on lifetime income by Michael Finke, a professor of wealth management at the American College of Financial Services, and David Blanchett, Prudential Financial Inc.’s head of retirement research. Finke and Blanchett found that retirees prefer to spend lifetime income, rather than other kinds of savings, and Finke says that often translates into habits that promote longevity.

“When people have that income that they know is going to last a lifetime, they tend to spend more,” Finke says. “It also increases the amount they spend on things that might actually extend their life span, like … regular doctor’s visits.”

The NBER study also found corroborating data from the University of Michigan’s Health and Retirement Study of U.S. retirees, in which retirees with annuities surveyed between 2002 and 2020 reported fewer symptoms of depression and disabilities, as well as a higher likelihood to exercise, not smoke and have lower body mass.

While annuities are sometimes criticized due to concerns about liquidity and their costs, advocates say the general population could benefit from their guaranteed payouts. Tamiko Toland, the founder and CEO of the 401(k) Annuity Hub—a subscription service to help retirement plan fiduciaries select annuities—says the NBER study shows the advantages of owning the insurance products go far beyond retirees with long life spans.

“We know that people spend more when they have guaranteed income. Now we know that they live longer and they have a better quality of life when they have guaranteed income,” Toland says. “Not everybody’s going to want [an annuity], but my goal in my career is for every worker to be able to easily say, ‘I want to do that. I can do that through my retirement plan.’”