This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Investors Opt for Annuities at Wrong Time: Study

By Laura Rowley, DailyFinance


NEW YORK ( Daily Finance) -- After last week's intense, if short-lived, stock-market crash, immediate fixed annuities might be looking good, especially to older investors. In fact, a new study finds that investors tend to base their annuity decisions on very recent market trends, making them more likely to annuitize during a market drop. But that approach can take a big toll on your retirement wealth.

With an annuity, an investor trades a large lump sum of money for a stream of monthly income for life. It's often a difficult decision for investors because the choice is irreversible. In an ideal world, a retiree would annuitize their savings when their portfolio has increased in value, because it gives them the opportunity to sell their stocks, collect the gains and exchange them for a larger monthly annuity payment.

But Alessandro Previtero, a finance professor at University of Western Ontario, found that investors do just the opposite: Frightened by market declines, they are more likely to annuitize when their portfolios have taken a hit. Meanwhile, when the market is rising, investors avoid annuitizing because they expect further gains.
More from DailyFinance
Consumers Spend More When They're Relaxed
Homeowners Abandoning 30-Year Mortgages
Why Some Consumers Remain Confident

In short, fear and greed rule the day. Just as investors make the mistake of selling their stocks when the market dives and buying -- or hanging on to them -- when it rallies, annuity buyers do the same thing. "If employees have additional resources invested in the stock market, positive returns can make them wealthier and less risk averse and, hence, decrease the value of choosing an annuity," Previtero writes.

What Bad Timing Could Lose You

Previtero investigated the relationship between the annuity decision and the stock market across several sets of data, including the actual pay-out decisions of more than 103,000 retirees between 2002 and 2008. They were enrolled in 112 different defined benefit plans at 63 companies. Some 49% of employees chose an annuity instead of a lump-sum payout.

To gauge investor expectations of the stock market during that period, Previtero used a confidence index that measured the percentage of individual investors who anticipated a rise in the Dow Jones Industrial Average in the coming year. A 1% increase in the index corresponded to a nearly 10% drop in the probability of purchasing an annuity.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $121.30 0.00%
FB $94.01 0.00%
GOOG $625.61 0.00%
TSLA $266.15 0.00%
YHOO $36.67 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs