Use Annuities To Protect Yourself From Yourself
May 22, 2014 by Jeffrey Brown
Everyone ages. And whether or not we care to admit it, each of us faces the risk of suffering from severely diminished cognitive ability as we grow older. In a recent article, Howard Gold referred to this as “the biggest retirement risk no one talks about.” The statistics are staggering: his article quotes a prior interview by Harvard economist David Laibson who stated that “half of the 80-year-old population is not in a position to make important financial decisions.” Professor Laibson should know: he co-authored an interesting article several years ago about how financial decisions deteriorate at older ages. He and his co-authors show that older adults pay higher interest rates and higher fees than middle-aged adults, and discuss the possible linkages between these patterns and cognitive decline.
Fraudsters and hucksters have certainly figured this out. The elderly are often victims of financial fraud. It is so common, in fact, that the National Council on Aging has even put out an article identifying the top ten frauds against the elderly. Interestingly, researchers at DePaul University have shown that elderly who are most (over-)confident in their financial decision-making abilities are the most likely to fall victim to such scams.
So, how does a worker or young retiree protect their future older self against their own bad future decisions including, but not limited to, becoming the victim of fraud?
One tool that deserves to be in the toolkit is a life income annuity. Life annuities are primarily thought of as a valuable way of insuring against longevity risk. In other words, by providing a steady stream of monthly income for the rest of your life, annuities guarantee that you cannot outlive your income. But they also serve another purpose: ensuring that any bad financial decisions you might make in the future do not permanently harm your ability to meet your basic financial needs. Even in the event that a fraudster tries to bilk you out of your savings, you will always have a steady paycheck coming in each month on which to live.
In essence, life annuities provide partial insurance against being the victim of financial fraud at older ages. Although this idea has only received scant attention in the academic literature, it has not gone completely unnoticed. Indeed, Roger Ferguson, CEO of the financial services giant TIAA-CREF (disclosure: I serve as a trustee for TIAA) noted in an article in the Risk Management and Insurance Review that “A person may be comfortable managing an investment portfolio and drawdown strategy in their 60s but not able to handle the complex decisions involved by the time they are in their 80s and 90s. Clearly, annuities can help mitigate this type of risk.”
In short, the need to protect your future self from poor financial decisions is one more reason to consider life annuities. Your future self may someday thank you.
