The annuitization puzzle

By John L. Olsen, CLU, ChFC, AEP

Olsen & Marrion, LLC


On another website, there appears an article that refers to the "annuitization puzzle," the reluctance of most consumers to annuitize a portion of their retirement portfolio, despite abundant academic evidence that this will often reduce — perhaps greatly — the probability that that portfolio will fail, at some future point, to produce required income.

I offered this response, which I thought might be of some interest to ProducersWEB readers:

The "annuitization puzzle" that Nobel Prize laureate Franco Modigliani described is what my partner and co-author Jack Marrion calls, "the irrational fear of 'annuicide.'" In my view, this reluctance to convert a capital asset to an income stream amounts to a basic inability to recognize that you can't have your cake and eat it, too. When you swap a stack of money for an absolute guarantee of income (perhaps for life), you don't get access to that stack of money because it's no longer yours; you swapped it for income.

If you need access to capital (because you might need it), then don't swap that amount of capital that you will likely need. Keep some capital and buy the amount of income that (a) meets your requirement for income and (b) doesn't reduce your capital below the level that you are so sure you'll need that you don't want to convert any more to income, even when that income will be certain.

Annuitization is both a "loss of access" and a "gain of assured income." The decision to annuitize is always, and inevitably, a trade-off.