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Mercer: The Annuity Dilemma

Posted by on Jun 12, 2011 in Retirement | 0 comments

Mercer U.S.

Desperate Households
May 2011

How many days! What desperate turmoil!
– John Keats

The above quote aptly describes the angst surrounding the choice between managing a portfolio of assets and using a portion to buy an annuity.

Retirees who expect to live beyond average life expectancy should be more inclined to purchase an annuity, assuming they understand the implications. Other retirees, based on their health, genetics or access to investment advice, may feel more comfortable receiving a lump sum.

This article examines some key issues facing late-career employees who are desperate for information about payout options from defined benefit (DB) and defined contribution (DC) plan assets. In particular, we assess the following three questions:
1. The annuity dilemma: Will annuitizing some assets help meet
long-term needs?
2. Buy now or buy later: When is the best time to annuitize?

3. Fear of annuitizing: What prevents a well-meaning retiree frompurchasing an annuity?

This article will also discuss the rationale for plan sponsors to offer meaningful solutions to employees who are contemplating retirement.

The annuity dilemma

Given the choice between managing a lump sum distribution andreceiving monthly payments for life, most retirees still opt for the lumpsum. The annuity option sounds great to retirees from a “can’t outliveyour money” viewpoint but is less attractive for those who are concerned that an early demise could leave money on the table. Even though annuities can be structured to provide income protection for a spouse or other beneficiary by adding some survivor protection, most retirees still decide to take the lump sum.


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