According to recent research, retirees who convert their savings into guaranteed monthly income through annuities may experience longer lifespans. A working paper from the National Bureau of Economic Research (NBER) indicates that individuals opting for annuities are approximately 3% less likely to die within a decade compared to those managing their withdrawals independently. While the difference is modest, it offers insights into how financial well-being affects overall health.
The study assessed data from around 600,000 retirees in Chile, where the retirement system largely requires workers to decide how to transform their savings into income. Findings show that over a five-year period, those using annuities had a mortality rate that was about 2.5% lower, with the gap increasing to roughly 3.6% over ten years.
Unique Aspects of Chile’s Retirement System
In contrast to the U.S., where retirement income often comes from a combination of Social Security and personal savings, Chile operates primarily on a defined-contribution pension system. Here, most employees build their retirement savings in individual accounts managed by private pension funds instead of relying on a government pension.
At retirement, individuals must decide how to access these funds—typically through the purchase of an annuity or by choosing market-based withdrawals, with some hybrid options available. Chile’s centralized marketplace facilitates easier comparisons and purchases of annuities, fostering one of the most active annuity markets globally. More than 60% of Chilean retirees opt for annuities, in stark contrast to the United States where fewer than 5% make the same choice, according to the Center for Retirement Research at Boston College.
The popularity of annuities in Chile is partly due to the limited alternatives available. Retirees who forgo annuities typically enter a government-run withdrawal system, which dispenses savings in periodic installments.
Potential Reasons for the Link to Longevity
The reasons behind the association between retirement income methods and longevity are explored by the researchers. One theory suggests that financial stress weighs heavily on retirees reliant on market-based withdrawals, who may worry about the longevity of their savings, particularly during financial downturns. Annuities provide predictable monthly payments, potentially reducing anxiety associated with financial uncertainty.
Another possible explanation centers on the idea that individuals with assured income are more inclined to invest in their health, such as maintaining regular checkups and preventive care. “Many people fear running out of money more than they fear death,” notes Angie Welsh, founder and president of My Annuity Agents. She adds that the financial stress stemming from uncertainty has tangible negative effects on both physical and mental health.
Retirees managing their withdrawals might find themselves “living and dying with every market spike and dip,” as they frequently adjust their sense of security according to short-term fluctuations in the market. For many, determining how much to withdraw can be daunting, particularly in the absence of a guaranteed paycheck to guide spending choices. The stress of uncertainty can lead some to hesitate in spending on essential needs that enhance quality of life, such as healthcare and nutrition, in efforts to safeguard their savings.
In contrast, a consistent income stream might provide a sense of stability, allowing retirees to spend with greater confidence. Welsh asserts that “the simplicity of a lifetime income account can provide a feeling of security that improves their mental well-being and empowers them to spend money on things that increase their longevity.”
Implications for U.S. Retirees
Even though Chile’s retirement framework is unique, the challenge of converting savings into a reliable income stream is a common concern. In the U.S., the responsibility increasingly lies with the individual, as traditional pensions providing guaranteed lifetime income have largely diminished, leaving retirees dependent on a combination of Social Security and personal savings.
While the NBER study does not posit that annuities are essential, it emphasizes the often-overlooked importance of predictable income. According to Welsh, the primary purpose of annuities is to provide stability and longevity insurance rather than maximizing returns.
This has led some financial planners to recommend using annuities to cover basic living costs—such as housing, food, and healthcare—while allowing the rest of the portfolio to remain invested for growth. Such an approach aims to establish a solid financial foundation, easing the pressure to make withdrawals during market downturns.
However, it’s important to recognize that annuities come with their own trade-offs. They typically restrict access to funds once acquired, and fixed payments may not maintain purchasing power if inflation increases. “Annuities are often dismissed because of their complexity,” Welsh comments. “But there is only one number that matters: What is the amount that is deposited into your checking account every month for the premium you provide?”
Ultimately, the manner in which retirees convert their savings into income could be as critical as the amount saved, suggesting that reducing financial uncertainty may not only yield greater peace of mind but also positively impact long-term health.