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Wharton Economist: Women At Greater Risk In Retirement Than Men

Traditional Financial Advice Is At Odds with Women’s Prospect of Living More Than 30 Years in Retirement

NEW YORK, N.Y., September 2, 2008 – Women are not doing enough to prepare for their financial security in retirement and they may be making misguided investment decisions based on their unique circumstances, according to a new study by Wharton professor David F. Babbel and co-sponsored by New York Life Insurance Company. In addition to being faced with decreasing rates of return on Social Security contributions, the demise of defined benefit pensions, and the added risk of outliving their nest eggs, women are living longer than men and therefore need to accumulate enough wealth to finance additional retirement years.

Highlights of the paper include:

  • As a result of living longer than males, women have traditionally been advised to assume greater financial risk in order to obtain the higher returns necessary to finance longer retirements; however these high-risk investment strategies can be flawed, often exposing women to unnecessary risk over the long term.
  • Women should allocate substantially less to higher-risk investments, stocks, and equity mutual funds, than what is typically recommended.
  • Many economists believe that lifetime income annuities should play a substantially larger role than previously suggested in retirement arrangements and should comprise 40% to 80% of total retirement assets for most people.
  • Income annuities from highly rated companies are a reliable, affordable source of guaranteed lifetime income.
  • During retirement, lifetime income annuities typically yield more than CDs, bonds, money market funds and what can be expected from common stock dividends without the market risk.
  • Income annuities can provide secure income for one’s entire lifetime for 25-40% less money than it would cost an individual to provide a similar level of secure lifetime income through traditional means, thanks to an insurer’s ability to spread risk across large numbers of people.
  • Even though initially women will pay more than men for each dollar of income, women actually pay less than men for equivalent annuities when their extended life expectancy is taken into account.

These findings are outlined in a paper entitled “Lifetime Income for Women: A Financial Economist’s Perspective,” which is based on an academic study entitled “Rational Decumulation,” co-authored by Professor David F. Babbel and Professor Craig B. Merrill, both Fellows of the Wharton Financial Institutions Center. The academic study was co-sponsored by the Center and by New York Life Insurance Company. In addition to his own academic study, in this paper Professor Babbel bases his findings on those of seventy other academic studies performed since 1999, and explores financial options for women, compares income annuities against other asset classes and disputes several misconceptions with regard to pricing and flexibility of income annuities.

“Economists from all over the world agree on the importance of lifetime income annuities and their central role in retirement planning,” said Professor Babbel. “However, annuities are even more important for women because their risks are compounded by being faced with longer life expectancy as well as potentially outliving their husbands by six years or more. A healthy woman at age 65 has a 50% chance of living beyond age 88 and a 25% chance of living beyond 94.”

Professor Babbel reviewed more than a dozen studies which show that males, being more tolerant of risk than females, are more likely to place their funds in risky investments. He cites research, stating that married women may have to live with the consequence of those risky choices made by their husbands unless they participate in the financial decision-making.

“In addition,” Babbel adds, “women have traditionally been advised to aggressively invest in hopes of attaining higher returns. This is contrary to what our research demonstrates. When compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, lifetime income annuities, when supplemented with fixed income investments and equities, are the best way we have now to provide for retirement.”

The study shows how annuitization provides for greater control of wealth. For example, an appropriate mix of annuities enables women to finance additional investments with remaining funds such as stocks, bonds or mutual funds, create an emergency fund, or gift with little impact on their financial security, as the money is not needed to fund their remaining lifetime.

The study also reveals that the market for lifetime income annuities has become very competitive in recent years, leading to advances in product features and more favorable pricing.

“Markups have come down from the 6-10 percent levels a decade ago to less than half that today. Combined with the modernization of income annuities in recent years, insurers have eliminated most, if not all, of the reasons why consumers have largely avoided these products in the past. With our academic findings now defining the enormous consumer benefits of income annuities, the arguments are compelling in favor of adding these products to retirement portfolios,” stated Professor Babbel.

“Unique flexibility built into modern income annuities make them even more attractive to women. Today’s annuities include features that allow access to cash when needed, inflation protection, the opportunity to participate in potential gains from rising interest rates, and the ability to leave a legacy for one’s heirs, all while providing welcome peace of mind in retirement,” said Mike Gallo, senior vice president, New York Life.

“In addition to the flexibility of this product, women will find that annuities offer a good value for the cost. In fact, women are actually getting the same annuity as men at a discount when factoring in the larger number of monthly payments over their lifetime,” said Professor Babbel.

Since women receive, on average, 42 extra monthly payments to accommodate their extended life expectancy, the annuity is spread out over a longer period of time, resulting in a lower monthly income. However, women ultimately pay less than men for the same annuity when comparing purchase cost with total benefits paid.

“As women face retirement, the reality of living longer and outliving their husbands, coupled with the future of Social Security and fading corporate pensions necessitates a hard look at income annuities as the core of their retirement portfolios,” stated Professor Babbel. “I believe the study shows that income annuities clearly should be more widely used, given that highly rated insurance companies are reliable sources of guaranteed income streams in retirement. And, as the only product that guarantees income for life, I encourage women to educate themselves on the product, learn more about the new features and take charge of their retirement futures.”

A copy of Professor Babbel and Professor Merrill’s academic study (co-sponsored by New York Life.), “Rational Decumulation,” can be downloaded from Professor Babbel’s paper, “Lifetime Income for Women: A Financial Economist’s Perspective,” can be downloaded from

David F. Babbel is Professor of Insurance and Risk Management and Professor of Finance at The Wharton School of Business, University of Pennsylvania and is Senior Advisor and Vice President at CRA International. Prior to joining CRA as a vice president in the Finance Platform and head of the Insurance Economics Practice, Dr. Babbel was a senior financial economist in the Financial Sector Development Department of the World Bank, and a vice president in the Pension and Insurance Department and senior advisor to Goldman Sachs. With over one hundred articles and publications to his credit, along with a number of books and monographs, Dr. Babbel is an expert in the fields of finance, investments, risk management, insurance, pensions, and international business. His specialties within these fields are life insurance, annuities, asset/liability management, fixed income securities, and valuation. In addition, Dr. Babbel previously served on the faculty at the Haas School in the University of California at Berkeley. During his 30-year career as an educator, Dr. Babbel has taught courses in finance, investments, fixed income, insurance, and risk management at the undergraduate, graduate, doctoral, and executive levels.

New York Life Insurance company, a Fortune 100 company founded in 1845, is the largest mutual life insurance company in the United States and one of the largest life insurers in the world. New York Life has the highest possible financial strength ratings from all four of the major credit rating agencies. Headquartered in New York City, New York life’s family of companies offers life insurance, retirement income and long-term care insurance. New York life investment management LLC provides institutional asset management and retirement plan services. Other New York life affiliates provide an array of securities products and services, as well as institutional and retail mutual funds.

Please visit New York Life’s Web site at and, a site dedicated to retirement issues, challenges, and solutions, for more information.

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Wharton Economist: Women At Greater Risk In Retirement Than Men

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