I just read a fascinating article this morning by Steve Parrish, a professor at the American College of Financial Services, discussing the findings from a 2019 retirement survey issued by the American College regarding respondents’ attitudes on retirement planning and knowledge of annuities. The study consisted of 1000 Americans ages 50-75 with a minimum of $100,000 of investable assets to gather views and opinions around retirement, the importance of guaranteed income, and overall knowledge of annuities. The survey findings revealed a severe lack of overall knowledge regarding annuities and their role in providing income during retirement. In addition to the survey, the respondents completed a separate annuity quiz.
The group that scored the best on the annuity quiz with only some limited knowledge of annuities were those that were actively planning for retirement, had a written retirement income plan, were aggressive investors, male, worked with an advisor and had $1,000,000 in assets. Sadly, none of these individual segments had higher than a 20% pass rate on the annuity quiz. The only exception being the $1,000,000 segment which had a 26% pass rate.
The big takeaway is that over four in five failed the annuity quiz. Specifically, the net who passed the quiz (scoring 60% or higher) was 14 percent, and the net who failed was 86 percent. One in four did not answer any of the ten quiz questions correctly.
Lack Of Overall Annuity Product Knowledge
Here is the shocking statistic in my opinion. The respondents that already had an annuity only had a pass rate of 18%! These were folks who felt compelled to buy an annuity product at some point in the past but couldn’t pass the quiz on a product that they currently own. There is room for improvement about educating consumers not only on the importance of having an annuity but also how annuities work! The good news is annuity owners cited guaranteed income and peace of mind as the main drivers with the majority suggesting they were happy with the product and would recommend to others.
Although Steve’s article is just the first output from this survey, it is telling that the overall lack of annuity knowledge is potentially driving people away from making informed decisions about how best to create an overall retirement income strategy plan. In particular, the article points out respondents valued guaranteed income but didn’t know much about annuity products that could provide the answer to achieving guaranteed income.
Broker Bias Against Annuities
The survey also revealed that 60% of the respondents were working with an advisor. Of the 60%, only 40% reported that their advisor recommended an annuity. The author took it a step further looking at the broader population where only 33% people said that an annuity had ever been suggested as part of their financial retirement plan. Why is this?
In a previous blog post, we talked about this issue (Why Is My Broker Recommending An Immediate Annuity Versus A Fixed Index Annuity). We pointed out that one of the possible reasons’ annuities are not discussed by advisors with their clients is the fact that client money going into an annuity means less money for an advisor to manage and receive account management fees. It’s not to say all brokers do this, only that there is an inherent advantage to present other options for managing retirement money to people who are retiring and subsequently leave annuity discussions off the table. If this indeed does occur, which I suspect is the case, it is a big disservice to clients who might benefit from having an annuity as part of their overall retirement income plan.
The survey, in general, showed that a majority (80%) are moderately confident they can manage their savings and they have enough to get by on in retirement. Some of the respondents were concerned however about healthcare cost and cuts to Medicare and Social Security in the future. Of these, 60% felt that monthly guaranteed income, in addition to Social Security, was very important. The other shocker (maybe not so surprising) there wasn’t a considerable amount of enthusiasm to pay for the monthly income. Most respondents favored cash in hand over monthly income.
Annuity Liquidity Fear
Favoring cash in hand over income is a result of “Annuity liquidity fear”. Liquidity fear is the fear that once you purchase an annuity, you will lose total control of your money. Liquidity was an issue with older annuities and immediate annuities. Part of the education hurdle that faces advisors who are discussing annuities is getting clients to understand that with newer annuity products, there is more flexibility with liquidity. Just like with any savings plan, the longer you let it grow, the better. If you feel like you will need access to the entire account balance in the first couple of years, an annuity is probably not the right choice. Advisors also need to remind clients that there are penalties for early withdrawals from 401ks and IRAs. There is no free lunch in the financial world nor is there a 100% perfect product that solves every single problem (I can guarantee it would not be free if it were to exist!)
In summary, clients and prospects deserve better education regarding annuities and the benefits they offer. At present, clients are looking for solutions that provide guaranteed lifetime income, liquidity protection, the growth of principal and protection from market risks during retirement. Unfortunately, the product that can help many clients rest easy is not well understood by the public. Yes, sometimes it boils down to peace of mind and security of having lifetime income and people are content with only that, but we know most people want and deserve to know more. Imagine how much better people would feel if they were just as comfortable with knowing the nuts and bolts of the product that they own and how the product was designed to protect them.
Annuities also need to be discussed as a part of the overall solution and not the total answer to retirement income planning. We are particularly fond of the “Flooring Method” where annuities are used to cover the essential retirement expenses. This way, retirees are assured no matter what, there basic financial expense needs are covered.