Income Illiteracy May Favor Simple Annuities

High rates of retirement income illiteracy among people 60 or older could favor simple annuities in the future, a retirement income expert said.

After all, the golden rule of investing is to avoid investing into what you do not understand.

Simple income annuities are among the most straightforward income products in the retirement income marketplace.

“For people with low literacy rates who are probably not able to manage portfolios and systematic withdrawals, it makes a lot of sense to come up with simple plans and strategies that are implementable,” said Jamie Hopkins, Retirement Income Program co-director at The American College of Financial Services.

Asset allocation, the 4 Percent Rule retirement portfolio withdrawal mantra, return on asset classes, tax implications, Social Security strategies — many of these concepts in retirement finance are lost on millions of retirees.

But talking to retirees about investing all or a portion of their $200,000 nest egg into an income annuity generating $700 a month for the rest of their lives?

It doesn’t get much easier than that — so long as a retiree is content on $700 a month from the nest egg for the rest of their lives, said Hopkins, a researcher on the just-published 2017 RICP Retirement Income Literacy Survey Report.

Large Percentages Come up Short

The survey found – as a previous American College retirement income survey did in 2014 – that large numbers of retirees fail income literacy standards.

The bulk of respondents came away with dismal results: 74 percent earned a failing grade, 13 percent earned a D, 8 percent a C, 5 percent a B and less than 1 percent an A, the survey found.

Respondents who passed the quiz are more likely to have a retirement plans, an indication that people who benefit from retirement income literacy are more likely to be involved in good financial planning, Hopkins said.

The survey polled 1,244 Americans between the ages of 60 and 75 with at least $100,000 in household assets not including their primary homes.

Answers were gathered through 20-mintue online interviews conducted between Feb. 16 and March 1.

Questions covered a range of retirement income planning topics from company sponsored retirement plans to Social Security to investment considerations to long-term care to Medicare, inflation and taxes.

Annuity Knowledge Low; Interest High

Literacy improved in areas such as housing, Medicare, inflation, taxation and life insurance compared with a similar study conducted in 2014. But many respondents still say they know little about annuities, even if their interest in retirement income remains high.

• 29 percent said that buying an immediate annuity will be more expensive for a younger person than for an older one, this year’s survey found.
• 17 percent know that the lifetime income payout rates for a 65-year-old man is in the 6 percent to 7 percent range.
• 14 percent know that a deferred annuity with guaranteed lifetime withdrawal benefits can pay income even if the investment account drops to zero.
• Nearly one in five respondents say they are not knowledgeable about annuity products in retirement, but 74 percent also say having a source of guaranteed lifetime income in retirement is important.

This suggests an enduring appetite for annuities, the survey report concluded.

Fewer than four in ten understood the basic features of a cash value life insurance policy, while six in ten know that the death benefit from life insurance is tax free, the survey found.

Over the next few years, income literacy is expected to improve as more people enter retirement age and begin the draw-down phase of their lives.

Even so, “We don’t expect America to get a whole lot smarter,” Hopkins said.

Findings About Advisors

In one of the more counter-intuitive findings, the study found that only 22 percent of respondents with a financial advisor passed the quiz, compared with 34 percent of those without a financial advisor.

Why would that be?

Respondents with advisors feel they can rely on and delegate retirement income issues to him or her, Hopkins said, while people without advisors are more apt to educate themselves on retirement income challenges.

Of respondents with an advisor, 48 percent said it was not important or moderately important for their advisor to act as a fiduciary. Fifty-two percent said it was extremely important for their advisor to act as a fiduciary.

Whether an advisor acts as fiduciary or not, however, is lost on many retirement income investors who aren’t familiar with the nuances advisory regulations, Hopkins said.

“Unfortunately, there isn’t even a uniform fiduciary rule so it’s hard for consumers to understand and to see the value,” he said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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