Latest Data Shed Light on "Annuity Puzzle"

Most Americans want guaranteed revenue in retirement but relatively few are willing to buy insurance products known as annuities that can yield steady income. Our July survey sheds some light on this paradox, known by some financial advisors as the “annuity puzzle.”

Our research shows that investors are growing increasingly concerned about having enough money set aside for retirement and acknowledge that annuities can be a good source of retirement income. At the same time, they balk at the fees and premiums associated with the product.

About one-third of the more than 760 investors surveyed in July say they feel annuities are a good source of retirement income, but nearly 30 percent say the costs associated with annuities outweigh any benefits. The wealthiest investors with $1 million or more are most likely (38 percent) to view annuities as too expensive.  

Only 11 percent of participants said they plan to buy annuities in the next 12 months. Investors with less than $100,000 are most likely to buy annuities (20 percent), while the wealthiest investors are least likely (7.3 percent).

These trends concern federal policy makers and advocates for the elderly who worry about the millions of Americans at risk of running out of money in retirement. Retirement concerns are exacerbated by anticipated cuts in Social Security and Medicare benefits, increased longevity, rising health care costs and reduced retirement savings due to the recession.

A recent study by the Government Accountability Office recommends that Main Street Americans work longer, purchase an annuity and delay receiving Social Security payments to maximize their income. A married couple with a total net worth of $349,000, as well as $170,000 saved in a 401(k), should consider using up to half of their financial assets to buy an inflation-adjusted annuity upon retirement, the GAO report recommends. The couple should also delay taking Social Security until at least full retirement age.

Families with fewer assets should focus on increasing their savings before investing in an annuity, the GAO said, while households at the highest wealth levels may have enough income to forego the guarantees, though annuities may be appropriate for wealthy investors who are very adverse to risk or expect to live for an extremely long time.

Annuities involve a contract between an investor and an insurance company. The terms and conditions can vary significantly, but typically an annuity promises to make scheduled payments in exchange for a lump sum of money or series of payments. The product can also include a death benefit to be paid to a beneficiary should the investor die before the annuity expires. The products also offer tax advantages because they shelter investment gains until they are withdrawn, but the gains are taxed at the ordinary income rate – not the lower rate for capital gains – when they are distributed.