Most investors say they want guaranteed income in retirement so it's puzzling why people don't buy annuities
Most investors say they want a guaranteed income in retirement, but far fewer are buying guaranteed-income products known as annuities. This long-standing disconnect -economic arguments for and investor attitudes against annuities - is known by the financial industry as the “annuity puzzle.”
“Annuities give investors what they say they want – guaranteed income and security in retirement – yet the majority of investors are reluctant to purchase them, preferring to buy life insurance policies,” said Catherine McBreen, managing director of Spectrem Group. “These actions could reflect a very human desire to leave wealth to spouses and children. The gap also points to the difficulty most investors have understanding how annuities work.”
A guaranteed income is the top retirement concern of Millionaires, according to a December survey of affluent investors. Our research shows that more than 70 percent of investors with $1 million to $5 million (not including primary residence) say it’s very important to have a guaranteed income in retirement. Yet, only about 25 percent own annuities, compared to 65 percent who have purchased life insurance.
An annuity guarantees scheduled payments at some time in the future in exchange for a lump sum or series of payments. Terms and conditions of annuity contracts, signed between an investor and insurance company, vary significantly. Some agreements include a death benefit, while variable annuities allow for tax-free growth of the product’s underlying investments.
Over the years annuities have gotten a bad rep. Our research shows that investors tend to avoid annuities because they view the products as expensive and extremely complex. Investors also point to the potential risk of negative investment returns. Only 22 percent of investors surveyed in 2009 found variable annuities to be an attractive investment.
Most Americans’ retirement outlook changed dramatically during the Recession as the two most common retirement assets, employer-sponsored retirement plans and home equity, took huge losses. Many investors realized they would have difficulty converting their savings into income to last their retirement, and more Americans began turning to annuities to achieve some financial security in retirement. Variable annuity sales have increased for five straight quarters, reaching $1.6 trillion in assets in the first quarter of 2011.
“Perhaps investors are starting to see that the real risk of running out of money during retirement can outweigh the disadvantages of annuities,” McBreen said.