EBRI Issue Brief

How Does the Level of Household Savings Affect Preference for Immediate Annuities?

Feb 8, 2017 20  pages


With the decline of defined benefit (DB) pension plans, there has been some renewed interest in providing other annuity income options to American workers, but demand for annuities has remained low in the United States. To develop future annuity income solutions, it is important to understand the public’s preferences for such products.

This Issue Brief uses a unique experiment in the Health and Retirement Study (HRS) to assess the effect of savings on the preference for immediate annuities (which begin paying out a regular stream of income as soon as they are purchased). Regression results show that people at the bottom- and top-ends of the savings distribution (those with the least and most assets) are more likely to buy annuities than people in the middle of the savings distribution. Also, savings has a large positive effect on preference for annuities only for those in the highest savings category.

Possible explanations for such behavior could be:

  • People at the bottom of the savings distribution are very likely to run out of money in retirement and thus are inclined to select annuities.
  • People at the top end of the savings distribution expect longer lifespans and can afford annuities even after leaving a financial legacy for their heirs.
  • People in the middle generally face more uncertainty about their retirement adequacy and so they are more likely to hold on to their savings for precautionary purposes and perhaps also for some hope of leaving a financial legacy for their heirs.

The results also show clear preference for annuitizing smaller shares of assets or partial annuitization. When compared to their current financial situation, only 16.5 percent of retirees (ages 65 and above) preferred full annuitization compared to 43.0 percent who preferred a one-quarter annuitization.

A large majority (70.2 percent) of the current Social Security recipient households receive at least three-quarters of their income in annuities from Social Security, employer-provided pensions, and other annuity contracts. The fact that most retirees are already highly annuitized might help explain the lack of demand for additional annuity income.