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Annuities as Dementia Insurance

Here’s an often overlooked reason to use annuities in your retirement portfolio: To prevent yourself from making mistakes in the event that you become cognitively impaired.

“The average person in his or her mid-80s has between mild and moderate dementia,” says Daniel Laibson, a professor of economics at Harvard University. In other words, he adds, “half of those in their eighties are not qualified to make financial decisions.”

The reason annuities can prevent financial mistakes is simple: With an immediate annuity, investors receive a steady check every month. While they can always opt to spend that money on something frivolous, it is difficult–if not impossible–to obtain access to the principal used to purchase the annuity in the first place. As a result, those with annuities are less susceptible to blowing all of their money in a financial fraud or unsuitable investment.

The statistics on dementia rates are stark: According to data Prof. Laibson presented on May 3 at a panel discussion sponsored by BlackRock, dementia affects only 0.8% of Americans between the ages of 60 and 64 and just 1.7% of those between 65 and 69. But the rates double every five years, resulting in a steep increase among those ages 70 and older:

AGE                              % WITH DEMENTIA

70-74                             3.3%

75-79                             6.5%

80-84                             12.8%

85+                                30.1%

Even worse, something Prof. Laibson calls “cognitive impairment without dementia” –a sort of “dementia lite” — affects a large percentage of those over age 70:

AGE                                                  % WITH COGNITIVE IMPAIRMENT WITHOUT DEMENTIA

71-79                                       16.0%

80-89                                       29.2%

90+                                          38.8%

BlackRock sponsors a product that packages stocks, bonds, and annuities in one target date mutual fund. (Target-date funds are very popular among 401(k) plan participants.) As a result, the company has something to gain by pushing annuities.

Still, given the high rates of cognitive impairment in the older population, it’s hard to dispute the logic of Prof. Laibson’s argument in favor of annuities.

Economists like immediate annuities for several other reasons. By providing a guaranteed monthly check for life, they remove the possibility of going broke in old age. Annuities can also make sense for those who worry about losing money in the stock market, but want a higher yield than what is available on bonds and C.D.s.

Still, Americans don’t seem to share in economists’ enthusiasm for the product. Purchase rates of immediate annuities are low, in large part because people don’t want to give up access to their principal. Some are also concerned about insurers’ insolvency.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.