What Elder Women Need To Know About Retirement and Annuitized Income

Written by: Cagla Yildirim | Assistant Professor, College of Business , Department of Finance New Mexico State University

Life-altering events can and do happen anytime to anyone. These events include but are not limited to the death of a spouse, a divorce, a severe illness, or a job loss. Such unexpected events happen sooner or later and can create financial difficulties, especially for women who live longer than men on average during retirement. Women are at more risk during retirement than men because they are less likely to have access to pensions and retirement savings plans for several reasons : (1) more women than men take time out of the workforce to care for family, (2) they have low-paid jobs, and (3) delegate financial management tasks to their husbands or partners. Thus, they are less likely than men to be prepared for retirement.

The lives of many older women are filled with endless responsibilities that cause them to have inadequate retirement savings. For many years, they raised children or cared for adult relatives, or both interrupted their careers and caused them to earn lower wages. These lower wages impacted them over time, as lower lifetime earnings meant less income to save in retirement plans and smaller Social Security benefits as these benefits are based on employment earnings.

In 2021, American females' life expectancy at birth was approximately three years longer than their male counterparts ( Arias et al., 2021). Since, on average, women live longer than men, most women can expect to spend more time in retirement than men and face higher risks of outliving their assets.

It also is essential to acknowledge that the family structure is changing in the U.S. Gurrentz and Mayol-Garcia (2021) report overall divorce rate in the U.S. has declined; however, divorce among adults 50 years or older has risen. The authors state that the percentage of women 55 to 64 years old who got divorced for the first time is approximately 43 percent. Among those 65 to 74 years who had ever married also have high divorce rates at 39 percent.

Raising divorce rates among older women may reduce the assets available to them in retirement. Widowhood may have similar results. In many traditional American households, men often handle retirement planning. This delegation has created a gap in women's understanding and engagement in retirement planning. This issue may have even more profound ramifications for them, as a lesser understanding of finances can lead to their mismanagement of financial issues. All above, divorce, widowhood, taking care of children/dependents, etc. affect retirement thus women need to prepare wisely for their retirement.

According to consumer theory, the goal of the consumer is to spend her available income so as to maximize her utility, where utility is defined as the enjoyment or satisfaction that she receives from consuming goods and services. Individuals prefer a fixed monthly income to one that fluctuates monthly. The more uncertain their resources are, the less satisfied they become (Vera-Toscano, Ateca-Amestoy, and Serrano-Del-Rosal, 2006). Annuitized incomes provide fixed incomes. However, income may be uncertain, and this uncertainty reduces utility.

Income from Social Security (S.S.) benefits, pensions, Defined Benefit Plans and annuities do not fluctuate. However, Defined Contribution (D.C.) Plans, such as 403(b)s, 401(k)s, and Individual Retirement Accounts, provide unstable income and expose retirees to financial risk. The main disadvantage of traditional D.C. plans is that retirees do not know how much income and how long they will receive during retirement. Because financial risk is placed on retirees and their incomes fluctuate, their utility may be reduced. Annuitized products such as annuities provide fixed income, and fixed income lead to higher level of happiness.

Retirement, Women and Annuitization

One of the reasons that women face economic challenges before and during retirement is that they have a long life expectancy (Hoffman and Averett, 2010). Women also tend to have lower lifetime earnings than men; thus, they are more likely to receive dependent or survivor benefits (Caldwell, Favreault, Gantman, Gokhale, Johnson, and Kotlikoff, 1999). Perhaps, women's gap in pension coverage and their longevity risk can be reduced by annuitized products. Because annuitized products can pay a stream of income for life, they allow their beneficiaries to reduce their longevity risk (Mitchell et al. 1999). Hurd (1989) reports that annuitization increases the expected lifetime utility of retirees if they already have fewer annuitized resources.

Despite their longevity protection, many retirees favor alternatives to annuities in funding their retirement due to pre-annuitized wealth (Dushi & Webb 2004). Several explanations have been provided by the previous literature on why people do not demand annuities. These include (1) bequest motives, (2) pre-existing annuitization, and/or (3) self-insurance by marriage. High levels of pre-existing annuitized income from S.S. benefits or private D.B. plans also can lower demand for voluntary annuitization because individuals who have them may feel that they do not need additional annuitized income (Pashchenko 2010; Dushi and Webb 2004). Retirees do not annuitize because they want to keep their assets in a form they can transfer to their beneficiaries upon their deaths (Lockwood, 2012). Kotlikoff and Spivak (1981) report that marriage can provide risk-sharing arrangements that can substitute for annuitized products. However, researchers emphasize the importance of annuitization in retirement planning (Mitchell et al., 1999). Annuities not only protect longevity risk but also allow retirees to have a higher level of spending (Finke & Blanchett, 2021). In 2014, the U.S. Department of Treasury 1 issued guidance to encourage annuities in 401(k) Plans. The goal was to help retirees manage their savings and ensure they have sustainable income throughout their lives.

Many women choose not to invest in financial knowledge, delegating financial decisions to their significant others. Because divorced and widowed women have less financial human capital at retirement that they can use to estimate how best to spread spending over an uncertain lifetime, it is essential for them to utilize annuitized products, including purchasing an income annuity from an insurer.

Why invest in Annuities?

  1. Annuities provide a steady stream of monthly income.

  2. Annuities mitigate investment risks. An annuity transfers the job of managing assets to the insurer.

  3. Annuities reduce longevity risks. An annuity will provide payments for the rest of the owner's life, no matter how long they live.

  4. Annuities can help cover essential retirement expenses that are not covered by any other annuitized income resources, including Social Security.

  5. Unlike 401(k)s and IRAs, annuities do not have contribution limits.

Quick Checklist in Shopping For an Annuity

  1. Check the financial strength of the insurer.

  1. Find good rates.

  • Ask how much the annuity will cost.

  • Pick one with the least commissions.

  • Choose the cheapest annuity price that meets your needs.

  1. Check with your State Guaranty Association.

  • If an insurance company defaults, state guarantee funds may continue to pay your benefits up to the state's maximum limit.


Arias, E., Tejada-Vera, B., Ahmad, F., & Kochanek, K. D. (2021). Provisional life expectancy estimates for 2020.

Blanchett, David and Finke, Michael S., Guaranteed Income: A License to Spend (June 28, 2021). Available at SSRN: https://ssrn.com/abstract=3875802 or http://dx.doi.org/10.2139/ssrn.3875802

Caldwell, S., Favreault, M., Gantman, A., Gokhale, J., Johnson, T., & Kotlikoff, L. J. (1999). Social Security's treatment of postwar Americans. Tax policy and the economy, 13, 109-148.

Dushi, I., & Webb, A. (2004). Household annuitization decisions: Simulations and empirical analyses. Journal of Pension Economics & Finance, 3(2), 109-143.

Gurrentz, B., & Mayol-Garcia, Y. (2021). Marriage, divorce, widowhood remain prevalent among older populations. U.S. Census.

Hoffman, S., & Averett, S. (2010). Women and the economy: family, work, and pay. 2e.

Hurd, Michael D. 1987. The marginal value of social Security. NBER Working Paperno. 2411. Cambridge, Mass.: National Bureau of Economic Research.

Kotlikoff, L. J., & Spivak, A. (1981). The family as an incomplete annuities market. Journal of political economy, 89(2), 372-391.

Lockwood, L. M. (2012). Bequest motives and the annuity puzzle. Review of economic dynamics, 15(2), 226-243.

Mitchell, O. S., Poterba, J. M., Warshawsky, M. J., & Brown, J. R. (1999). New evidence on the money's worth of individual annuities. American economic review, 89(5), 1299-1318.

Pashchenko, S. (2013). Accounting for non-annuitization. Journal of Public Economics98, 53-67.

Vera-Toscano, E., Ateca-Amestoy, V., & Serrano-Del-Rosal, R. (2006). Building financial satisfaction. Social Indicators Research, 77(2), 211-243.

1 https://home.treasury.gov/news/press-releases/jl2673

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