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Are Annuities Actually as Valuable as They Seem?


A new study titled “How Much Do People Value Annuities and Their Added Features?” from the Center for Retirement Research at Boston College finds that while just 12% of investors with assets of more than $100,000 open an annuity, more than 50% of investors who could benefit from a simple annuity don’t buy one because the process is too complicated.

The report notes that a longstanding puzzle in economics is why so few people take advantage of annuities to provide a guaranteed stream of income during retirement. The answer, according to the report’s authors, economists Karolos Arapakis and Gal Wettstein, is “the difficulty of actually buying an annuity in the real world.”

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How Do Annuities Work?

An annuity is an insurance contract that provides a stream of fixed payments in exchange for a paid premium. They are often touted as a way to stabilize retirement income by turning some portion of invested assets into what some planners call “a retirement paycheck.”

Annuities come in several different types, with some being straightforward while others include multiple investment options, varying guarantees and optional added riders. These can vary from riders that provide a death benefit to the ability to withdraw unused principal or even long-term care insurance. To some, the more complex annuities can be difficult to understand and expensive, potentially pushing them away from buying one.

Simpler annuities can be used to even out income in retirement and provide retirees with some protection against the swoops and swoons of the stock market. With a simple single-premium annuity, for example, an investor pays a lump sum upfront for a guaranteed series of payments during retirement, no matter what’s going on with interest rates, stocks, bonds or the overall economy. Even the more complicated variable and indexed annuities, and their available rider options, can potentially meet the needs of specific investors.

But even the most basic annuity comes with several drawbacks. Perhaps the most important is that while the purchaser is protected from any drop in their payments, they also sacrifice potential gains from other investment opportunities. There’s also the fact that the fixed payments don’t adjust for inflation, which leaves the investor with a steady erosion of the purchasing power of their payments over time. A final objection is that it can be difficult or even impossible for the investor to cancel the contract and withdraw the unused portion of the principal, unless they potentially pay for a rider upfront.

So, Are Annuities Actually Valuable to Retirees?

Over the years, insurers have added options that have overcome many consumer objections without significantly increasing the rate of purchases, the Center for Retirement Research’s study found. While 50% of investors say they want an annuity, only 12% actually purchase one. In addition, the research model used suggests that 95% of investors would add an annuity if their objections were overcome.

These objections aren’t about annuities themselves, the researchers concluded, but because of “channel factors” that discourage investors from buying annuities. These include not understanding annuities and how to choose one, selecting from the raft of options and the necessity to find an annuity provider or broker and signing a contract.

The study concludes that, “Future work can further disentangle the various small hurdles to annuitization which combine to prevent almost half the population studied here, who want annuities, from actually benefitting from them.”

Bottom Line

Many investors would buy an annuity for retirement – and many more could potentially benefit – if these insurance products were less confusing and easier to buy. This statement seems to be confirmed by the Center for Retirement Research at Boston College’s recent study.

Tips for Retirement Planning

  • A financial advisor can help you build a retirement plan for the future, with or without an annuity. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • An annuity can be a part of a retirement plan, along with stocks, bonds, commodities and other investments, along with pensions, Social Security and other sources of income.

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