A New Take on the Annuity Puzzle

By Jeanne de Cervens

Essay Overview

Sound economic models of rational human behavior predict that individuals planning their retirement will buy an annuity to protect themselves against the risk of running out of money. Why, then, do so few people who are planning for retirement buy an annuity that would provide guaranteed lifetime income? That question is known as the annuity puzzle (Brown et al. 2017).

People rarely make financial decisions in a vacuum, however. Economic models do not fully take into account the power of emotion, biases, and other countervailing forces in any financial decision. This essay will explore the countervailing forces and propose additional research and solutions geared to solve the annuity puzzle.

Finally, it will propose a new retirement puzzle, of which an annuity is an essential piece. For purposes of this essay, reference to annuities, unless otherwise noted, will be to annuities that provide a fixed guaranteed stream of income for life, regardless of whether immediate or deferred.

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About the Author

Jeanne de Cervens is a lawyer, public policy strategist, thought leader, and consultant on retirement security and aging matters. Jeanne led Federal Government Affairs for Transamerica through 2019 and served as a member of the Transamerica Center for Retirement Studies/Aegon Center for Longevity and Retirement global research team.

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