Retirees who convert their savings into guaranteed monthly income through annuities can live longer, according to a new study.
A working paper from the National Bureau of Economic Research, or NBER, finds that people who choose annuities are 3% less likely to die in the next decade than those who manage withdrawals alone. It’s a small difference, but it can say a lot about how financial security shapes our overall well-being.
The study analyzed data on nearly 600,000 retirees in Chile, where the retirement system forces most workers to choose how to turn their savings into income.
Over five years, pensioners had a low mortality rate of 2.5%; in 10 years, that gap widened to about 3.6%.
Why Chile offers a unique case
Unlike the US, where retirement income is a mix of Social Security and personal savings, Chile relies heavily on a defined contribution pension system. Most workers build up their retirement savings in accounts managed by private pension funds instead of a traditional government pension.
When he retires, he has to choose how to get that money – usually by buying a guaranteed annuity or choosing a market-based withdrawal (of which there are mixed options). Chile also has a centralized marketplace that makes annuities easily compared and purchased.
That structure has helped create one of the most efficient annuity markets in the world. More than 60% of Chilean retirees choose a pension, compared to less than 5% of US retirees, according to the Center for Retirement Research at Boston College.
Part of the reason annuities are so popular in Chile is that alternatives are limited. Retirees who don’t buy an annuity instead enter a government-administered retirement plan that pays out savings gradually.
What could explain the link to longevity
So why is the way you take your money when you retire not be linked to how long you live?
The researchers point to several possible explanations. Another financial stress: Retirees who rely on market-based withdrawals may face more uncertainty about how long their savings will last, especially during a downturn. Annuities, in contrast, provide a solid check. That stability can reduce the anxiety and psychological stress associated with financial uncertainty.
A second explanation is that people with guaranteed income are more likely to invest in their lives, such as continuing routine checkups, preventive care and other ongoing health needs.
“Many people fear bankruptcy more than they fear death,” says Angie Welsh, founder and president of My Annuity Agents. “The financial stress that comes with the unknown has real negative effects both physically and mentally.”
Retirees who manage their withdrawals alone can end up “living and dying with every ups and downs of the markets,” he said, constantly adjusting their sense of security based on short-term market swings.
For some, the process of figuring out how much to withdraw can feel overwhelming, especially when there is no guaranteed check to back up spending decisions. Even when a plan is in place, he says, uncertainty about whether the money will last can still create lingering anxiety during market downturns.
That stress, Welsh says, can change behavior. Without a steady stream of income, some retirees are reluctant to spend on the essentials that support their quality of life – such as health care, nutrition and community services – because they are trying to avoid spending money on savings.
Instead, lifetime income can create a sense of stability that makes it easier for retirees to spend their money. “The convenience of a lifetime income account can provide a sense of security that improves their psychological well-being and empowers them to spend on things that extend their life,” Welsh said.
What does this mean for US retirees?
Although the Chilean system is different, the basic challenge remains: turning savings into a reliable paycheck that lasts as long as you do.
In the US, that responsibility increasingly falls on the individual. Traditional pensions — which once provided guaranteed income for life — have largely disappeared, leaving many retirees to rely on a mix of Social Security and personal savings.
However, the findings of the NBER paper do not mean that annuities should have them. However, the study highlights something that some retirees overlook: the value of predictable income.
The purpose of annuities is “to bring stability and provide long-term insurance,” Welsh said, not to maximize returns.
That’s why some financial planners suggest using annuities to pay for essential expenses — like housing, food and health care — while keeping the rest of the money invested for growth. The idea is to build a strong financial base that reduces the pressure to withdraw during market downturns.
However, annuities still come with tradeoffs. They often limit access to your money once you buy, and fixed payments may lose purchasing power over time if inflation rises.
“Annuities are often dismissed because of their complexity,” says Welsh. But there’s only one number that matters: How much money is deposited into your checking account every month with the payment you offer?”
Ultimately, how you convert your savings into income later in life may be as important as how much you save. Reducing financial uncertainty is not just about peace of mind; it may also play a role in long-term health.
More from Mali:
This Little-Used Retirement Strategy Can Increase Your Fixed Income Payout by 23%
Why Many Americans Buy Annuities for Retirement
Are You Worried Your Retirement Money Won’t Last? Consider This Another Way
