The Misery of Spending Down the Nest Egg : The Effect of Annuitization on Consumption and Wellbeing

We study the effects of annuitization compared to spending down a lump-sum on consumption and subjective wellbeing. Analyzing longitudinal data on UK retirees before and after the pension reform that provided greater freedom to draw down savings, we find that annuitization increased retirees’ consumption and life satisfaction. To further examine the behavioral channel of these effects, we conducted a field experiment with college students, giving them a flow or lump-sum payment. As predicted, flow payment benefited those who were tightwads. Our results provide direct evidence of the possible benefits of annuitization to those who have problems with under-spending and shed some light on the debate about pension policies