Are Cognitive Constraints a Barrier to Annuitization?

IB#15-6

The brief’s key findings are:

  • Even though retirees are increasingly responsible for deciding how to draw down their assets, few buy annuities.
  • Researchers have offered a host of explanations for the limited take-up, but the puzzle has never been solved.
  • This analysis finds that valuing annuities is hard for people, so they may only buy one if offered a very good deal.
  • To test this finding, alternative explanations were explored and the results were negative, strengthening the conclusion that people find annuities hard to value.
  • These results suggest that many individuals, on their own, may have difficulty making well-informed choices about managing their money in retirement.