What Is the Value of Annuities?

IB#21-5

The brief’s key findings are:

  • In a 401(k) world, retirees have to decide how to draw down their nest egg. Annuities are one solution, but few people buy them due partly to cost concerns.
  • This study estimates annuity values using two measures: 1) the expected present value of benefits per premium dollar; and 2) the insurance value.
  • The expected present value is about 80 cents per dollar for immediate annuities and 50 cents for deferred annuities, amounts that have remained stable since 2000.
  • But accounting for the insurance value suggests that everyone gains from purchasing annuities, with deferred annuities offering the best deal.
  • Blacks have a lower expected value than whites due to shorter lifespans, but they gain more from the insurance because their lifespans are more uncertain.