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Solving the Lifetime Annuity Puzzle
Michael Kitces in Nerd's Eye View Link to more items from this source
July 10, 2013

"[E]conomists have long struggled to explain the so-called 'annuity puzzle' -- the fact that while the research suggests annuitization should be optimal, in practice remarkably few people ever choose to do so.... [Previous research] assumed that once the path of rising mortality rates over time was set, based on the individual's health conditions at the start, it would always evolve in the same manner, without any volatile shocks along the way. Yet of course, in the real world, health shocks do occur, and can change the course of the original longevity path... In the context of annuitization, this issue is especially important, as health shocks present an uncertainty that has a unique 'double whammy' risk ... the risks of decreased annuity value and higher costs are triggered by the same health event, which means they're actually correlated with each other in a remarkably undiversified manner, and as a result may be especially unappealing to a risk-averse investor!"

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