Could annuities help clients live longer?

Financial advisors know all about the traditional benefits of annuities. Guaranteed lifetime income can help protect against longevity risk, improve spending confidence, and reduce sequence-of-returns risk. But here’s a benefit you may not have considered: Annuity ownership may actually help retirees live longer.

That’s the conclusion of a recent working paper, “The Effect of Annuities on Longevity”, which examined nearly 600,000 Chilean retirees over an 18-year period.¹ The challenge for the researchers was separating cause from correlation. After all, people who expect to live longer are often more likely to purchase annuities because they stand to receive lifetime payments for a longer period.

Indeed, the findings of the paper create a classic selection bias problem. Simply observing that annuity owners live longer does not tell us whether the annuity caused the outcome or whether longer-lived individuals were simply more likely to buy one in the first place.

To address this issue, the researchers took advantage of a behavioral quirk: Individuals approaching retirement often extrapolate recent market returns into the future. Following strong market performance, retirees are less likely to lock themselves into a guaranteed income stream. Following poor market performance, they become more attracted to the certainty of an annuity.

Since recent market returns can influence the decision to annuitize but should have little direct impact on whether someone is still alive 10 years later, the researchers were able to isolate the effect of the annuity decision itself. Using this approach, they found that annuitization reduced mortality by approximately 2.6% over five years and 3.6% over 10 years.

Easing uncertainty

So how exactly might annuities help retirees live longer? The authors propose several explanations, but one stands out as particularly intuitive. Annuities provide a steady income stream for life, eliminating much of the uncertainty that comes from relying on a portfolio that fluctuates with the markets. That certainty may reduce financial stress and anxiety, both of which can negatively affect physical and mental health.

More specifically, research has shown that financial stress can be linked with depression and lower self-esteem, loss of focus, and difficulty making decisions², as well as poor sleep quality³ higher smoking rates⁴, and increased blood pressure and cortisol production.⁵

Importantly, the researchers found that the benefits of annuities were strongest among retirees who later experienced poor investment outcomes, suggesting that relief from financial uncertainty may be an important part of the story. They also found evidence that annuitants were more likely to engage in preventive healthcare and reported lower disability rates later in life.

Beyond financial outcomes

The idea of outcomes is an important one when discussing the overall financial plan and the possible inclusion of an annuity with clients. Typically, clients think of money as producing financial outcomes. But financial security can also influence emotional outcomes, behavioral outcomes, health outcomes, and potentially even longevity outcomes.

In other words, retirement income may be about more than cash flow – it may also be about peace of mind.

The bottom line for advisors: When discussing the potential benefits of annuities with clients, this study provides another compelling talking point. We typically frame annuities as a way to protect clients from the financial consequences of a long life. This research raises an intriguing possibility: Annuities may not just insure against longevity risk—they may actually help support longevity itself.

While no single study should drive a recommendation, these findings highlight another reason why clients should thoughtfully consider the role that guaranteed income may play within a well-designed retirement income plan.

IMPORTANT INFORMATION

Annuities are long-term investment vehicles designed to accumulate money on a tax-deferred basis for retirement purposes. They limit access to the investment as a result of a surrender charges and are subject to a 10% tax penalty on certain withdrawals. Riders are generally available for an additional charge. Variable annuities are subject to investment risk, and investment return and principal value will fluctuate.

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change.  Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.