February 1, 2016

Solving the 'Annuity Puzzle: It's All In How You Ask The Question

“We conclude Dutch plan members generally welcome the partial lump sum option over full annuitization. Framing and default settings are capable of predictively steering annuity demand…..”.


What is the ‘Annuity Puzzle’?

Economists have long believed retirement savers should convert their retirement savings into a life-long stream of pension payments (i.e., annuitize) when they retire. Why? Because risk-aversion would push retirees to preferring safety over greater wealth accumulation with the looming uncertainty about how many years their pension pot would have to last. This logic is embedded in the design of traditional DB (defined benefit) plans, which automatically annuitize 100% of retirement savings over the course of participants’ working lives.

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