Perceptions of Mortality Risk: Implications for Annuities

Matthew Drinkwater and Eric T. Sondergeld

Abstract —This chapter examines how people view and manage mortality risks in retirement. While the chances of dying are small in any given retirement year, the financial consequences of untimely (early or late) death can be important. Consumers attempting to incorporate mortality risks into their retirement strategy are often told to use life expectancy estimates, even though life expectancy is an inadequate and often inappropriate planning concept. Moreover, consumers are usually invited to use the same approach to post-retirement retirement planning as pre-retirement financial planning, which undermines the importance of mortality risk and the role of products such as income annuities that provide protection against such risk. Recent research investigating the perception and management of various retirement risks, has important implications for annuity providers.