Many retirees should consider an immediate annuity, which kicks off a fixed, regular stream of income for life. The advantage isn't just financial: Studies show that retirees who have guaranteed income to cover some of their costs are happier than those who don't.
So why do few people buy annuities? Partly owing to legitimate concerns about insurers that sell them -- the AIG bailout certainly didn't inspire confidence. But also at work is a fear of losing control, plus a bias called the endowment effect: You value what's in your possession more highly than something you don't have, even if that something else is worth just as much. Annuities trigger that bias because they require you to "give up" a big chunk of money upfront.
To learn how to combat this tendency, Jeffrey Brown, a finance professor at the University of Illinois, and some colleagues recently tested different ways of describing annuities to a group of people 50 and older.
One description was of a monthly income of $650 for life; another, a return of $650 for life. Same thing -- but three times more people went for the first option. "Just shifting the perspective away from accumulating wealth to producing income can make a big difference," Brown says.
Put these findings into action:
Remember: It's not all or nothing. One way to overcome your reluctance to lose control, says Harold Evensky, a financial adviser in Coral Gables, Fla., is to remember that the standard advice is to put just a portion of your retirement savings into an annuity -- and to focus on the reliable monthly income it can provide.
See if you can snag an institutional rate. Knowing you got a good deal can help lower your anxiety. And about 1,200 employers now allow their 401(k) participants to buy immediate annuities through a service called Income Solutions at low prices that only large institutions typically get. What's more, Vanguard just announced it will do the same for its 401(k) and retail investors. Check with your plan to see if you qualify.
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