Speaking at the at the Managing Retirement Income conference in Boston earlier this week, Meir Statman, a professor of finance at Santa Clara University, said that although annuities are good for people, in that they provide a secure form of income, they are not bought very often.
Statman said behavioral portfolio theory provides many reasons for people not to invest in the product. People like rising expectations, he said; they like to save the best for last. But with annuities, people see it as having the best and giving it up. People think, “I used to be a millionaire, now I live on $79,700 per year,’ he said; “If framed this way – it’s a cold shower.’
Further, since people have an aversion to loss, he said, they are more likely to invest in a bond where they know they will break even or better. In an annuity, people are reluctant to invest because they know they can die tomorrow and lose it all. People also have an aversion to regret, Statement commented, and are sure that the day after they purchase the annuity, the market will skyrocket.
In order to get people more interested in purchasing annuities, Statman suggested identifying examples of people who are in poverty because they didn’t save. Then, the industry should “make running out of money as vividly dreadful as the lottery ads make winning vividly wonderful,’ he said, which might allow them to understand why they should invest in a product designed to provide a steady stream of income.