Consumers may have an approach/avoidance conflict when it comes to annuities. They see the value of the annuity’s income stream and tax deferral but they also have excuses for not buying — excuses that advisors might counter with a reality check based on research.
Following are three examples drawn from survey responses ofmore than 1,300 people, including more than 700 retirees.
Genworth, which conducted the survey, described the excuses as consumer “hesitations” to purchase an annuity. Whatever the term, substantial numbers of people apparently share the concerns.
Excuse 1: Fifty-eight percent of the survey consumers said they believe they already have enough predictable income to satisfy their retirement needs.
Reality: That is even though over three fourths (78 percent) of pre-retirees in the group predicted they will not have enough money to retire as planned and 36 percent said their expenses maybe too high for them to retire when they want to. It is also despite the fact that, although 52 percentof pre-retireesexpected their expenses to decrease in retirement, 65 percent of actual retirees found their expenses stayed the same or even increased in retirement.
Excuse 2: Fifty-three percent of those who are considering annuities said they have “second thoughts” because they would rather invest in the market.
Reality: The survey found that 85 percent of those who do own annuities consider a predictable income stream to be “critical” to their ability to have the retirement they envision. That finding does not directly address market investing preferences, but it does point out that annuity owners put a premium on the predictable income that annuities can provide.
In a statement, Eric Taylor, vice president and national sales manager for annuities at Genworth, addressed the market investing issue this way: "Fixed annuities offer protection against market downturns, the opportunity to create guaranteed lifetime income, and can help offset other portfolio risks such as inflation and rising interest rates.”
The survey report adds a related point: “Some annuities are designed to help you benefit from growth in the market, without the downside risk of direct investment.” (The report does not name these annuities, but most industry professionals will recognize the comment as a reference to fixed annuities.)
Excuse 3: Fifty-two percent of the survey group objected to annuities because of experiencing discomfort with investing money where they can’t have access without penalty for a period of time.
Reality: The survey found that 78 percent of people who already own annuities are “satisfied” with their purchase, the researchers said. (Note: In addition, many annuities allow for penalty-free withdrawals during the accumulation years and sometimes commutation of remaining value during the income years.)
Many agents and advisors can probably add several other excuses and reality checks to the list. Perhaps the above can be a starting point or a refresher.
Industry professionals consistently emphasize that annuities are not for everyone, and that no one should put all their money into an annuity. Tax, estate, long-term care and many other needs must be factored into the decision, along with many other considerations, they say.
But as for weighing the pros and cons of putting “some” money into annuities, clients may benefit from seeing quantitative and qualitative data that helps them think the decision all the way through to what actually happens in retirement when annuities are in the picture or not.
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