In opposition to long-standing conventional wisdom and research that extolls annuities’ ability to provide life-long income, most households should not annuitize any of their wealth, according to a study from the Congressional Budget Office.
In explaining their conclusion, the study’s authors, Felix Reichling of the CBO and Kent Smetters, from the Wharton School, state that “the present value of the annuity stream falls after a negative shock to health that reduces a household’s life expectancy.” At the same time, the authors state that negative health shocks often produce “correlated costs” such as a loss of income, an increase in uninsured medical outlays, or both. Such factors, along with the “liquidity constraints” of annuities, combine to reduce their appeal.
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