Making The Case for Annuities

I’ve found that there is a gap between the way that TV and internet personalities talk about annuities versus how salt-of-the-earth financial advisors talk about annuities. If you search the internet for information on annuities, you will find that many of the top results warn consumers against buying them. However, if you sit down with retirement financial advisors, as we at Group 1001 have done in our routine market research, you will find that many view annuities as the “cornerstone of retirement portfolios.”

The case built against annuities typically falls into one of two categories:

1. Don’t buy something you don’t understand

2. 401(k)s and IRAs are better vehicles than annuities

Lack of Understanding?

The truth is that annuities fall to the right of stocks, bonds, and mutual funds on the “investment complexity” spectrum. There are fees associated with the purchase of annuities, riders, and other structuring decisions that may be beyond the retail investor’s self-guided grasp. However, the fact that retail investors may need to educate themselves to more fully understand annuities does not mean that annuities would be a bad fit for their retirement portfolios.

401(k)s and IRAs are better?

The common argument that retail investors should be investing, at a minimum, in their 401(k) up to their employer match or in an IRA up to the statutorily defined limits rather than in an annuity is an incomplete argument. While it is wise to advise a younger investor preparing for retirement against investing in an annuity money that could get them matching employer funds in their 401k, it is wrong to extrapolate from a case like this that annuities are generally inappropriate as many prevailing TV and internet personalities imply. To do so leaves unanswered the questions:

1. What is the best use of an annuity?

2. Who should be looking to use them?

3. When should they be used?

Our Research

In our market research with financial advisors, we learned that the top reasons they sell annuities are to:

1. Help their clients have stable cash flow throughout all of retirement (82%).

2. Help their clients protect principal through the ups and downs of the market (68%).

These insights resonated well with insights we gleaned from research we conducted with retail investors who were in or near retirement. The top concern consumers in this stage of life expressed is the fear of outliving their money. Somewhat humorously, the second top concern after “man, I’m gonna live too long” is concern about physical health or “man, I’m not gonna live too long.”

One critical takeaway here, outside of the fact that human worry is humorously diverse, is that annuities, the instrument many financial advisors believe to be the cornerstone of retirement portfolios, also solve the greatest need that retirees express in not wanting to outlive their money. And how do retail investors arrive at the point of being comfortable buying something as complex as annuities? Our research makes clear that consumers trust their financial advisors’ portfolio recommendations.

Also interesting to note is the impact that financial advisors see in consumer behavior when consumers have the assurance that they will not outlive their money that annuities can provide. Financial Advisors report that consumers have an easier time transitioning from the accumulation phase of retirement to the drawdown phase (another difficult aspect of retirement). Consumers feel more comfortable spending the money they set aside for themselves when they know it won’t run out.

Research from The American College of Financial Services has found that retirees who get the peace of mind that comes from converting cash savings into annuities effectively double the amount of money they are willing to spend every year on themselves and their families. For retirees, the security provided by an annuity solves their biggest concern and frees them to enjoy retirement.

Jason Atkins is the Director of Innovation Strategy on the G1001 Innovations Team at Group1001