Psst! Hey, buddy. Wanna know a sure-fire way to sell an annuity? It's been scientifically proven to work. All you need to do is re-frame the perspective of the buyer and—WHAMMO!—the sale is made.

If this sounds too good to be true, it probably is. But research shows if you shift the perspective of retirement investors from thinking “lump sum” to thinking “monthly payout,” you have a better chance at selling that annuity—with two important caveats.

In a paper, “The Illusion of Wealth and Its Reversal,” researchers Daniel Goldstein, Hal Hershfield and Shlomo Benartzi attempt to answer the question, “Why do people more often choose the lump sum option instead of the annuity?” What they discovered may shed some light on, and help, annuity sales. It may also show there's a brick wall out there through which no annuity can pass.

It seems as if the large real dollar numbers of lump sum payouts mesmerize folks heading into retirement. That's where the “illusion of wealth” comes from. Since the lump sum number has many more digits than the money number, and since most people don't have net present value calculator chips in their heads, the raw size of the lump sum gives the immediate appearance of greater wealth. This holds true even when the two numbers are financially equivalent.

A funny thing happens, however, when you dramatically increase the value of the lump sum and its equivalent monthly payout. People are now more likely to choose the monthly payout instead of the lump sum. It turns out they don't need that present value calculator chip. Their brains can easily apply a simple heuristic based on monthly expenses. It goes like this: If the monthly payout exceeds the monthly expenses, pick the monthly payout; otherwise, take the lump sum.

For those selling annuities, the message is clear: Shift the prospect's focus from the “big” lump sum equivalent number to the prospect's personal monthly expenses. If the annuity's monthly payout exceeds that expense, you've got a very good chance of making the sale.

Unfortunately, there are two caveats. The first is obvious. What happens if the annuity's monthly payout fails to offset the prospect's monthly expenses? Well, then the research implies the odds of a successful sale fall.

The second caveat might even be more of a challenge. There's an interest rate assumption that goes into calculating the monthly payout. That assumption may be significantly less than the expected market return (whether or not that expectation is reasonable). In this case, the astute prospect (i.e., the one with the net present calculator chip implanted in their brain), will opt for the lump sum. There are both mathematical and behavioral reasons for this.

And that's a brick wall almost no annuity can break through.

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