Expert Viewpoint: A Generational Lens Provides New Insight Into The Annuity Puzzle

2 minute read

A short essay providing a unique perspective on the 2021 Protected Retirement Income and Planning Study

By David Blanchett, fellow at the Alliance for Lifetime Income’s Retirement Income Institute, and managing director and head of retirement research at QMA

There are few financial products where perceptions differ as significantly between academics and consumers as annuities. Academics generally have positive views of annuities, which I define as products that provide guaranteed, or protected, income for life. Annuities provide a valuable form of insurance against longevity risk that is effectively impossible to replicate in a traditional portfolio of stocks and bonds.

Annuities provide a valuable form of insurance against longevity risk that is effectively impossible to replicate in a traditional portfolio of stocks and bonds.

Consumer perceptions of annuities vary and are not always as positive as those of academics. Despite the nearly 50 years of research on the potential value of annuities, and annuitization in general, demand for annuities is well below suggested levels, an effect often referred to as the “annuity puzzle.”

It is important to understand why these differences exist. The inaugural Protected Retirement Income and Planning Study, conducted for the Alliance for Lifetime Income and CANNEX by Artemis Strategy Group, surveyed people between the ages of 45 and 75 with $100,000 in investable assets about their perceptions of annuities.

The more fascinating results of the survey center on the varied interest in owning an annuity and the reasons an individual chooses to pass on that option. There are also some interesting responses across ages. Here are some highlights.

Firstly, it is important to note that interest in annuities or lack thereof varied significantly by respondent. In short, there does not appear to be a common denominator explaining why households choose not to annuitize. There is no simple answer.

Secondly, there was a notable decline in interest in purchasing an annuity as investors got older. At first this may seem counterintuitive since one would think interest in a product that provides guaranteed lifetime income would rise as someone approaches retirement. In reality, what happens is that annuity ownership rises by age and households end up joining the pool who already own an annuity (and are not purchasing more annuities) or those who are not interested in purchasing one. In other words, people who want to buy an annuity do, and those that have yet to purchase one become increasingly less likely to do so as they get older.

Thirdly, there are also differences by age in why individuals choose not to own an annuity. For example, younger investors (ages 45-55) are not being adequately informed about annuities, much less having the product recommended to them. Older investors (ages 65-75) cite having sufficient perceived savings or existing sources of guaranteed income as well as being warned against purchasing annuities as reasons for their reluctance. In other words, there is no one reason consumers eschew annuities.

The results of the survey suggest that younger consumers have potential interest in annuities but need more education. In older households, investors may not think they need annuities, but if they are properly educated on the risks of retirement, especially longevity risk, their thinking may change. The annuity puzzle is, in some sense, a series of puzzles but the missing piece is most likely consumer education.

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