Annuities provide retirees with guaranteed lifetime income, which workers say they want, but they haven’t been embraced by investors, according to an issue brief published in March by the Center for Retirement Research at Boston College.
The report found that annuity holders get back about 80 cents for every dollar they spend on premiums for immediate and indexed annuities. The value of deferred annuities is much lower at around 50 cents. CRR justified this difference in relative value, noting “the widely-touted benefits of deferred annuities are not based on their expected values, but rather their insurance value.”
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In fact, the authors wrote, “the purpose of an insurance product is not to make money but rather to protect against losses. In the case of annuities, the goal is to protect against outliving one’s assets.”
Looking at the value of annuities this way – how much wealth an investor would need to start with to be just as well off without an annuity as with one – deferred annuities are more attractive, CRR found. Wealth equivalence was between 0.8 and 1.0 for both immediate and indexed annuities, while equivalence for deferred annuities was under 0.8, indicating investors needed less wealth for an equivalent outcome with or without the annuity.
“The high insurance value for deferred annuities stems from their unique focus on protecting against the small probability of living a very long time,” according to the report, emphasizing the particular value of deferred annuities that protect against longevity.
Race and education can have an impact on value and wealth equivalence as well, as Black investors and people with lower levels of education tend to have shorter lifespans, the report found.
The money vale of an immediate annuity was 84 cents for highly educated Black women, compared to 90 cents for white women with the same level of education. The gap narrowed to between one- and three-cent differences at lower levels of education. A bigger gap existed between Black male investors and their white counterparts: 82 cents versus 90 cents. The gap also narrowed at lower education levels, but was more pronounced than among women, with five- and six-cent differences.
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However, the report found that in terms of wealth equivalence, annuitization was more valuable to Black investors.
“The reason is that wealth equivalence is influenced by the uncertainty of the length of the lifespan, not by the length of the lifespan itself,” the authors wrote.
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