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The article addresses both your point and the GP's point directly: Economists have long said that the rational thing to do is to buy an annuity. At retirement
by roymurdock 10y ago
The article addresses both your point and the GP's point directly:
Economists have long said that the rational thing to do is to buy an annuity. At retirement age, you could pay an insurance company $100,000 in return for some $5,000-6,000 a year in guaranteed payments until you die. But most people don’t do that. For decades, economists have been trying to figure out why.
James Poterba, an economics professor at MIT who has extensively studied American retirement, says it’s still a mystery why annuities are so unpopular. A number of theories have been advanced — people might like to leave some money for their children, or they might worry about medical expenses late in life. Poterba and his colleagues have also pointed out that Social Security is already like an annuity, promising constant payments for life.
But there’s also some evidence that people just irrationally dislike annuities. As behavioral economist Richard Thaler wrote in the New York Times: “Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even.”
Here is where tontines come in. If people irrationally fear annuities because they seem like a gamble on one's own life, history suggests that they irrationally loved tontines because they see tontines as a gamble on other people's lives.
I agree that financial literacy in the US is low, and the basic accounting/finance classes should be required at the high school level, but this article is good and draws upon a decent amount of actual economic literature. I recommend reading it to the end.
- jessriedel 10y agoI actually did read this article to the end back when it was written last year, but I wrote the above comment based on a faulty memory. Thank you for the correction. The problem with the article is less than I claimed, but it is still written in a confusing and sensational way.
- ianai 10y agoI'd bet it's mostly to do with fear of sudden, large expenses. Part of the reason to save up a large stock of funds is to be able to pay off big, unexpected bills. To shell out a large sum for an annuity also requires them to shell out (some?) of that ability. The elderly probably couple that with a disdain for taking on financial debt.
- iumtuip2001 10y agoI'd like to put forward another possible reason why someone might opt to not get an annuity... If you are financially savvy, or can pay someone else to be, does it not make more sense to invest your money yourself? There are a number of "too big to fail" companies, like GM, and Wells Fargo, that offer dividends. If you composed a portfolio of high dividend, stable, stocks... Could you theoretically have a "guaranteed" monthly income AND the ability to liquidate, in the event of an emergency?
- greeneggs 10y ago> If you composed a portfolio of high dividend, stable, stocks... Could you theoretically have a "guaranteed" monthly income AND the ability to liquidate, in the event of an emergency? No. You can buy an annuity, or US Treasury bonds, but guaranteed high returns don't exist, and adding in a liquidity requirement doesn't help. Note that GM declared bankruptcy in 2009. Even if it is still "too big to fail," that doesn't mean investors can't lose all their money.
- iumtuip2001 10y agoI never claimed guaranteed high returns. An annuity doesn't guarantee you "high" monthly income. It guarantees you AN monthly income. My comment was to address the question regarding why more people don't use annuities, and I'm not sure your response counters that. Regarding GM, yes, I'm aware they went bankrupt. But correct me if I'm wrong - Investors didn't lose their shares? The government bailed them out, and they're operational today. That's what I mean by "too big to fail".
- greeneggs 10y ago> In the case of GM, investors who held shares of the company before its reorganization saw their equity holdings cancelled in March, 2011. Per the company's reorganization plan, they did not receive any shares of the "new" GM. http://www.fool.com/investing/general/2016/02/23/what-a-corporate-bankruptcy-means-for-shareholders.aspx http://www.fool.com/investing/general/2016/02/23/what-a-corp...
- spacehome 10y agoI really wanted to like annuities. It's a great concept, but when I looked into annuities, they were all pretty bad deals as compared to just investing in the market yourself. It is true that you offload some risk, but the price you pay for lowering your risk is just too high.
- jessriedel 10y agoCan you quantify that at all? What's "too high"?