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
-
Three Ways President Trump Could Impact the EconomyThe Letter Some of Trump's top priorities could boost economic growth, but others risk fueling inflation.
-
Average Health Care Costs by Age: Can You Afford It?Expect to pay more as you age. We've got solutions for how to cover these costs, which can exceed $1,000 per month in your 60s.
-
Will You Be Able to Afford Your Dream Retirement?You might need to save more than you think you do. Here are some expenses that might be larger than you expect, along with ways to ensure you save enough.
-
More SECURE 2.0 Retirement Enhancements Kick in This YearSaving for retirement gets a boost with these SECURE 2.0 Act provisions that are starting in 2025.
-
Saving for Your Emergency Fund: As Easy as 1-3-6An emergency fund that can cover six months' worth of expenses is far easier to build if you focus on smaller goals at first.
-
The Wrong Money Question to Ask After Trump's ElectionIf you're wondering what moves to make with a new president moving into the White House, you're being dangerously shortsighted. Here's what to do instead.
-
An Investing Plan for This Year: Doing Less Can Lead to MoreAchieve more when investing in 2025 by planning to work smarter, not harder. These three strategies can help put you on the right track and keep you there.
-
All About Six Types of Auto Insurance CoverageDo you know what your auto insurance policy covers? Here's a primer on some coverage categories, along with examples of how each type of coverage works.
-
Social Security and Medicare Funding: Is the Sky Falling?Social Security and Medicare are slowly running out of money, but what does that mean for the retirees counting on them? Actually, it's not all bad news.
-
What We Need to Do to Protect Retirees' Financial SecurityCognitive decline and aging in general put older retirees at risk of losing their financial security when they're the most vulnerable. What can be done?
