The nexus between investor sophistication and annuity insurance ownership: evidence from FINRA's National Financial Capability Study

What is it about?

Although annuitization provides insurance against longevity risk that can benefit households, researchers have uncovered an annuitization puzzle, which suggests households are reluctant to annuitize their wealth. This study contributes to the discussions on the annuitization puzzle by examining investor sophistication and owning annuities in non-retirement accounts using the 2018 U.S. National Financial Capability Study. Unlike prior studies, we consider four mutually exclusive measures of investor sophistication to understand the effect of investor sophistication on annuity ownership. The findings indicate that investor sophistication contributes to the annuity puzzle. Investors with low objective and high subjective investment knowledge are more likely to own annuities compared to those with low objective and low subjective investment knowledge. However, investors with high objective and low subjective investment knowledge are less likely to choose annuity ownership compared to those with low objective and low subjective investment knowledge. The findings and ensuing discussion highlight the importance of annuitization when planning for retirement, with implications for financial practitioners.

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