Annuities Have an Awareness Problem: Why That Matters
The shift away from pensions means millions of Americans won't be financially secure in retirement. Annuities could help, but many don't know what they can do.
In the 1934 comedy classic It’s a Gift, W.C. Fields’ character encounters an aggressive, slick-talking annuities salesman in an indelible scene that helped shape a negative perception of the product. Despite decades of product innovation and the adoption of industry-wide operating principles benefiting consumers, some would have you believe that selling annuities has changed little in the intervening decades.
The reality is that annuities are manifestly popular with U.S. consumers, at least among those who know enough about them to have an opinion. According to the 2021 Protected Retirement Income and Planning (PRIP) Study, three times as many consumers have a favorable perception of annuities (33%) as those who have a negative perception of them (11%).
However, most consumers (56%) are either neutral or uncertain in their perceptions of the product. The framing also matters. Our research finds that 48% of defined-contribution plan participants would prefer annuitization when the choice is framed as income rather than as an investment.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
So, annuities have an awareness problem, not a perception problem.
What consumers like about annuities
Despite the awareness gap, many consumers value the discrete benefits of annuities, according to the 2021 PRIP Study. A guaranteed income stream in retirement (33%) and the protection of a portfolio’s assets (25%) are particularly favored, followed by guarding against declines in the stock market (23%) and the ability to protect an initial investment (23%).
In addition, nearly eight out of 10 consumers are interested in annuities as part of an employer-sponsored retirement savings plan. When asked if they would recommend the product to a family member or friend — a universal benchmark for customer satisfaction — eight out of 10 annuity owners said they would do so.
Perhaps the greatest affirmation of the popularity of annuities is their ever-increasing sales. Following record-high totals in 2022, total first quarter annuity sales were $92.9 billion, a 47% increase from the prior year. This represents the highest quarterly sales ever recorded, according to LIMRA’s U.S. Individual Annuity Sales Survey. The organization expects total annuity sales in 2023 to exceed $300 billion for the second consecutive year.
Still, the awareness gap with annuities is a problem that needs to be solved sooner rather than later. 2024 will mark the greatest surge of new retirees in the nation’s history. The Peak 65 generation is testing a retirement system described by Bloomberg and Barron’s editors as a crisis burdening the country’s social safety net.
Indeed, 40% of U.S. households risk running short of money in retirement, according to a 2019 study by the Employee Benefit Research Institute. When looked at on an individual basis, the average retirement savings shortfall for those ages 60 to 64 ranges from $12,640 per individual for widowers to $15,782 for widows. It increases to $24,905 for single men and $62,127 for single women.
A need for protected income in retirement
When the Peak 65 generation entered the labor market in 1980, 60% of private-sector workers relied on the protected income provided by a pension plan as their only retirement account, as compared to 4% in 2020. Today, only 20% of all civilian workers participate in a defined-benefit pension, with a large portion of those workers employed in federal, state and local governments.
The shift away from defined-benefit plans to 401(k)s and other defined contribution plans means that millions of Americans lack sufficient protected income required for a financially secure retirement, especially since Social Security was designed to replace about 40% of income in retirement for the average worker.
Therefore, reconciling the awareness gap regarding annuities — even for consumers for whom the products don’t make sense — will increase awareness of the need for protected income in retirement. Consumers interested in learning more about annuities should consult with a financial professional, of course, but not before taking some basic steps.
To begin, consumers should evaluate their investment goals and the extent to which protected income is a need. If an annuity helps them do things that other investments cannot, they should acquaint themselves with the various types of annuities that exist, along with the guarantees they provide.
What else to consider about annuities
To narrow the field of potential investments, consumers should then consider the specific benefits of an annuity, including the ability to grow or protect their assets. They also should understand the costs and potential risks, as well as the duration of their investment and the strength of the insurance company.
Finally, consumers should discern how and when they can realize the income generated by an annuity, along with what happens if they need to withdraw some or all of their money earlier than expected. It’s also important to understand how annuity income and withdrawals are taxed.
The Alliance for Lifetime Income has created an array of educational resources, including a worksheet consumers can use to determine if an annuity is right for them. The more Americans understand the need for protected income in retirement, the greater their ability to retire with a more secure economic future, one with less risk and higher levels of confidence.
related content
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Jason J. Fichtner, PhD, is a Senior Fellow and Head of the Retirement Income Institute, a scholarly research and thought-leadership program of the Alliance for Lifetime Income (ALI), where he manages the research, strategy and operations of the Institute. He is widely recognized as a leading researcher and expert on Social Security, federal tax and budget policy, and retirement security.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published