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

Decumulation of assets is a complex problem for individuals. We study the effects of annuitization compared to spending down from a lump-sum on consumption and subjective wellbeing. By exploring the pension reform in the UK as an ideal regression discontinuity design, we find that annuitization increases consumption, self-reported health condition, and life satisfaction for retirees. To further examine the behavioral channel of the annuity effect, we conducted a field experiment on college students, giving them a flow or a lump-sum payment. We find that flow payment increases consumption for people who feel pain when spending, and restrain consumption for people who have problems restricting their spending. Our results thus provide direct evidence of the effects of annuitization on consumption and wellbeing and call for policies to enhance the annuitization of retirement assets.