The Link between Annuities and Retirement Well-Being

It appears that people who have access to the pension-like, guaranteed lifetime income that comes from annuities might be happier in retirement.

The empirical basis for this possible correlation between annuities and retirement satisfaction is in a working paper by Constantijn W.A. Panis, Ph.D.   This working paper evolved into a chapter of the book Pension Design and Structure:  New Lessons from Behavioral Finance, Olivia S. Mitchell and Stephen P. Utkus.

The chapter—titled "Annuities and Retirement Well-being”—presents the results of a study that focuses on two measures of retirement well-being:

  1. Self-reported satisfaction with retirement.
  2. The number of self-reported depressive symptoms.

As the author Constantijn Panis indicates:

We are particularly interested in the association between the degree of annuitization and subsequent retirement well-being. Do people prefer being relatively rich at retirement, with a large amount of their own money readily available to be spent as flexibly as they wish? Or would they rather have the comfort of knowing they have a steady income in perpetuity? Our answers afford a peek into the well-being of the next generation of retirees.

The data set and basis for the analysis is the Health and Retirement Study (HRS)—a national (U.S.) survey that began in 1992 with 7,700 households (with someone in the household aged 51-61) and 12,600 respondents.

Among other topics and questions, the study asked a couple of questions regarding well-being in retirement:

  1. Has retirement turned-out to be very satisfying, moderately satisfying, or not at all satisfying.
  2. A set of questions (similar to the Center for Epidemiologic Studies Depression (CES-D) scale which is based on 20 questions designed to assess symptoms of depression.

At a high level, the study finds that health and financial resources are the main factors driving retirement satisfaction.

The bottom-line with respect to annuities and retirement satisfaction is that there is a positive correlation.  In other words, the study finds that greater levels of annuitization are related to greater levels of satisfaction throughout retirement. 

According to the author:

“the more people felt that they could count on lifelong guaranteed pensions, the more satisfied they were with their retirement.”

More details to follow based upon input and approval from the author.

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