Economists and the Case for Simple Income Annuities
“There is almost a consensus in the ‘ivory tower’ that annuities make sense for the consumer… There have been 2,000 articles about annuities written by card-carrying professors since the 1960s and 99.9% of them are pro-annuities.”
– Prof. Moshe Milevsky, York University
Economists tend to be big fans of annuities. In study after study, economists have generated life-cycle consumption models and built a solid case that longevity risk can be offset by incorporating annuities into a retirement plan. They consistently tout the economic logic behind annuities.
But which annuities?
Importantly, when economists discuss the benefits of annuities they are often referring to one type in particular: “plain vanilla” income annuities.
Researchers from the Brookings Institution explain, “we note a distinction between the annuities often studied by academics and those utilized in the market. In the context of retirement security, academics often study ‘income annuities’- those products that are often purchased with a single premium and return a stream of income. In practice, many annuities also include an accumulation aspect, whereby they serve as tax-preferred savings vehicles and are often barely or never annuitized at all- making the term ‘annuity’ a confusing misnomer.”
The researchers singled out one practical reason for the gap between academic literature recommending annuities and the experience of retirees who avoid them: the complexity of some of the products.
Income annuities are different. When used as part of a comprehensive retirement plan, they offer a straightforward way to safeguard against longevity risk. They focus squarely on the “spending down” part of retirement and highlight the unique strength of insurance companies to offer lifelong income guarantees.
And a side benefit of the simplicity of income annuities is that the fees that come with purchase are traditionally lower.
Income annuities- also known by the technical names of SPIAs, DIAs and QLACs – can be an important way to capture the insurance protection that economists praise while avoiding some of the off-putting confusion of other annuity products.
At ALEX.fyi, we only offer a curated selection of straightforward income annuities from some of the best names in the insurance business. If outliving savings is a concern, then income annuities may be part of the answer.