The average American turning age 65 today can expect to live 40% longer than someone who turned 65 in 1950. Further, the number of Americans retiring every day has more than doubled over the last 20 years.
Regardless, only 7 percent of retirees and pre-retirees are counting on annuities to be an important part of their retirement portfolio, according to a new study from Principal Financial Group and the Stanford Center on Longevity.
This compares to much higher reliance on Social Security benefits (64%), personal savings and investments (38%), and 401(k) or 403(b) plans offered by employers (35%).
The research attributes the low adoption rate to several factors:
- Consumers may not see income annuities as simple or easy to understand. Variable annuities and indexed annuities have a reputation for being more complex and sometimes more expensive.
- Consumers don’t want to “lose” money by putting it in an annuity and possibly dying before getting their money back. They may value access to their money over the promise of not running out of money.
- Financial professionals are still warming up to annuities. Some may lack understanding of how annuities work and may not position them with clients.
- Retirement plan sponsors are the gatekeepers of America’s defined contribution plans—the retirement savings vehicle for millions of Americans. Since very few plans currently offer guaranteed lifetime income options in their plan’s lineup, people may just not be familiar with them.
SECURE steps
Product innovations such as automatic enrollment and automatic escalation and the growth of target-date funds have helped many Americans to save for retirement, the organizations note. But at retirement, many find themselves in a financial world with little to guide them on how to spend down their retirement savings, facing a wide variety of complicated decisions and few ways to protect themselves financially if their retirement lasts longer than average. These factors underscore the value of working with financial professionals.
“With the passage of the SECURE Act last year, we took an important first step towards creating a framework for guaranteed retirement income solutions,” Sri Reddy, senior vice president, Retirement and Income Solutions at Principal. “This study shows us there is a real need for industry, plan sponsors, financial professionals and policymakers to collaborate at new levels to increase access to lower-cost income annuities and similar lifetime income solutions so American workers may have a more secure retirement and more confidence that they will not outlive their resources.”