It’s an age-old puzzle that has stymied insurance companies, financial advisors, and investors: If buying annuities is a good option for many retirees, as some think, why aren’t more people purchasing them?
That’s what the Center for Retirement Research at Boston College recently asked in a new report titled “How Much Do People Value Annuities and Their Added Features?” Its findings, while perhaps not surprising, should raise serious concerns for insurers trying to market such products, and for potential buyers.
“I don’t believe that everyone should annuitize, but it’s just surprising that the penetration rates are so low,” said Karolos Arapakis, research economist and co-author of the Center’s report. “It could potentially be due to a lack of financial literacy or a general negative perception of the product.”
It’s not exactly that the annuity market is suffering. In fact, 2023 saw a record $385 billion in annuity sales and the number is expected to climb this year. Yet, financial experts say there is nevertheless a huge unmet market for the financial instruments.
To try and get to the heart of the matter the survey queried those near or in retirement with more than $100,000 in financial assets. About half of respondents said they would be willing to buy an annuity at prevailing market rates. But just 12 percent said they actually did so. The study looked at whether the low purchase rate could be explained by a lack of liquidity or the inability to make bequests but found no such evidence.
Lack of annuity knowledge cited
“In short, people may be deterred not by a lack of interest in annuities but by a lack of knowledge of the product and how to buy it,” the report concluded.
Indeed, a simple Google search of “annuities” returns dozens of results that sound more like warnings than come-ons. And the ones that don’t are often filled with financial jargon, restrictions, caveats, and complexity that would turn off the savviest investor.
Many respondents, Arapakis said, might not know that annuities exist, or might have heard the name but they don’t understand how they work.
“And others might not know how to purchase them because it might not be straightforward for someone,” he said. “But we believe that this is one of the main drivers in reducing utilization rates.”
Since 1965, economists have argued that many individuals should annuitize at least some of their wealth in retirement. But a national biennial Health and Retirement study of Americans over age 50 conducted by the University of Michigan found just 12 percent of households with financial assets over $100,000 receive any annuity income.
Social psychologists have long recognized these so-called “channel factors,” small characteristics of a situation that can have far-reaching consequences for the ability of individuals to follow through on their intentions, the report said.
For example, a classic experiment found that giving students information on the importance of vaccines produced the intention to be inoculated. But only a small group, who were given concrete plans for receiving the shots, ended up getting vaccinated. This result, replicated many times since, led to the conclusion that intentions are insufficient to produce action on their own, but rather require specific step-by-step plans.
“In the context of annuities, this finding implies that wanting to buy an annuity is meaningfully removed from actually buying one,” the report says. “The results of the new survey and its randomized control trial are consistent with this social psychology intuition.”
The survey on which much of report was based was conducted by Greenwald Research in June of 2023. It questioned 1,216 individuals aged 55-to-95 who had more than $100,000 in savings, excluding real estate, defined benefit pension plans, and the value of any business.
Among other things it asked those surveyed if they thought it was valuable to own a guaranteed lifetime income product. More than 76% said “yes,” and almost 55% said they thought it was a good idea to buy a product that guaranteed a certain amount of lifetime income.
Other questions returned positive outlooks on annuities, such as they can provide financial security, peace of mind, and low market risk.
The study found that the roughly half of respondents would be willing to buy an annuity at prevailing market rates was a far greater share than those who actually do buy annuities.
“I am not sure if it’s a failure of marketing but it’s definitely a problem if people want to buy them, and they don’t,” said Arapakis. “But it’s not clear why this is happening and whether the insurance companies could, for example, do something in terms of better marketing or in terms of financial education. It’s complex and we’re not entirely sure if it’s just marketing, or if there are other factors.”
A simpler explanation, though an educated one, is that generally annuities do not earn returns that keep pace with inflation. This is especially true with many fixed and fixed indexed annuities. A variable annuity may offer a better chance to keep pace with inflation, but with added risk.
In addition, some annuities are bogged down with high fees, complicated redemption policies and the fact that one may receive as much money as they’ve invested.
Still, at current rates, annuities might be a sound investment for some retirees, but they still aren’t convinced.
“I think financial advisors oftentimes don’t recommend them,” said Arapakis. “And they don’t really believe in them. But a bigger problem might be people don’t know they exist and how to differentiate between the various products.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at email@example.com.
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