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A new study titled “How much do people value annuities and their added features?” from Boston College’s Center for Retirement Research finds that while only 12% of investors with assets over $100,000 open an annuity, more than 50% of investors who could benefit from a simple annuity don’t buy one because the process is too complicated is. complicated.
The report notes that a long-standing puzzle in economics is why so few people take advantage of annuities to provide a guaranteed income stream during retirement. The answer, according to the report’s authors, economists Karolos Arapakis and Gal Wettstein, is “the difficulty of actually buying an annuity in the real world.”
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An annuity is an insurance contract that provides a stream of fixed payments in exchange for a paid premium. They are often touted as a way to stabilize retirement income by turning a portion of invested assets into what some planners call “a retirement paycheck.”
Annuities come in different types, some of which are simple, while others include multiple investment options, varying guarantees and optional extra clauses. These can range from passengers providing a death benefit to the ability to withdraw unused principal or even long-term care insurance. For some, the more complex annuities can be difficult to understand and expensive, which may put them off purchasing one.
Simpler annuities can be used to smooth income in retirement and give retirees some protection against the fluctuations of the stock market. For example, with a simple single-premium annuity, an investor pays a fixed amount up front for a guaranteed series of payments during retirement, regardless of what’s going on with interest rates, stocks, bonds or the economy as a whole. Even the more complicated variable and indexed annuities, and the additional options available, can potentially meet the needs of specific investors.
But even the most basic annuity has several disadvantages. Perhaps most importantly, while the buyer is protected from a drop in their payments, they also sacrifice potential profits from other investment opportunities. There’s also the fact that the fixed payments do not adjust for inflation, leaving the investor with a steady erosion of the purchasing power of their payments over time. A final objection is that it may be difficult or even impossible for the investor to cancel the contract and withdraw the unused portion of the principal, unless he possibly pays for an additional amount upfront.
Over the years, insurers have added options that have overcome many consumer objections without significantly increasing purchase rates, the Center for Retirement Research study found. While 50% of investors say they want an annuity, only 12% actually buy one. Moreover, the research model used shows that 95% of investors would add an annuity if their objections were resolved.
These objections are not about annuities themselves, the researchers concluded, but because of “channel factors” that discourage investors from purchasing annuities. These include not understanding annuities and how to choose one, selecting from the range of options and the need to find an annuity provider or broker and sign a contract.
The study concludes that “future work can further disentangle the various small barriers to annuitization that combine to prevent nearly half of the population studied here who want annuities from actually benefiting from them.”
Everyone’s financial circumstances and goals are different. Consider using this free tool to speak with a financial advisor who can help you navigate the annuity-related considerations in your situation.
Many investors would buy an annuity for their retirement – and many more could potentially benefit from it – if these insurance products were less confusing and easier to purchase. This statement seems to be confirmed by the recent research from Boston College’s Center for Retirement Research.
A financial advisor can help you draw up a pension plan for the future, with or without an annuity. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
An annuity can be part of a retirement plan, along with stocks, bonds, commodities and other investments, as well as pensions, Social Security and other sources of income.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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