In early February, the Employee Benefit Research Institute (EBRI) issued an assessment of why immediate annuities continue to have lackluster sales. The answer lay in savings patterns.
Specifically, the study divided subjects into three categories: those who have the least savings, those who have the most, and the vast majority in the middle. It found that the two extremes are more likely to buy annuities than those in the middle.
People who have saved the least, EBRI concluded, buy annuities because they are afraid of running out of money in retirement. Those who have saved the most buy them because they can afford to, even after leaving an inheritance for their heirs.
"People in the middle generally face more uncertainty about their retirement adequacy," said the report, "and so they are more likely to hold on to their savings for precautionary purposes."
While that may be true, John Kennedy, head of retirement solutions distribution at Lincoln Financial Distributors in Radnor, Pa., notes that other factors also come into play. "Interest rates have a significant influence on immediate fixed-annuity income sales," he says. "As interest rates rise, immediate annuity income rises and sales trends will follow."
Scott Stolz, senior vice president of private client group investment products at Raymond James in St. Petersburg, Fla., isn't convinced the study is "realistic or useful," he says.
He explains: "While a desire to receive retirement income in the form of some kind of annuity likely is indeed influenced by (a) the relative level of savings, and (b) the current amount of guaranteed income, I do not believe that explains the reason people have been reluctant to buy immediate annuities."
Stolz posits several other reasons that so many clients are reluctant to buy annuities. First, he says, people underestimate the cost of funding income for life. When they come to see how much is needed to generate adequate lifetime income, "they immediately assume it's a bad deal," he says.
They also don't like making an irrevocable decision, locking their money into an annuity with few options for getting it back if they change their mind. And they fear that if they die too soon, the investment was a waste. "They don't want the insurance company to 'win,'" says Stolz.
Most people, he asserts, would rather have money in hand that they can spend today rather than put it aside for tomorrow. That's evident in the low overall savings rate. "Bottom line is that everyone wants a pension, but few want to fund it themselves," says Stolz.