Study: Americans Lack Annuity Knowledge

The American College of Financial Services
August 8, 2019

While many financial experts see the value of lifetime income in retirement planning, annuities remain a misunderstood financial product among consumers who are looking for greater security.

The American College of Financial Services commissioned the financial research group Greenwald & Associates to perform a 17-minute interview with over 1,000 Americans aged 50-75 with at least $100,000 of investable assets to find out their attitudes concerning retirement, the importance of a guaranteed lifetime income, and their opinions on and knowledge of annuities.

The 2019 American College Guaranteed Lifetime Income and Annuity Study reveals that consumers value guaranteed income, but know little about annuity products. It is also unlikely that they are presented annuitization options by their financial advisor.

The four primary findings are:

  1. Consumers are moderately confident about having enough for retirement
  2. Many have worked with a financial advisor and have some idea of what they need for retirement
  3. Having a guaranteed lifetime income is valued by many, but there is a reluctance to pay for it
  4. While consumers often hear about and have had annuities recommended to them, almost none of them understand the specifics of how annuities work

Below is a summary of the results of the survey.

Overall retirement readiness

Americans in the defined contribution age are clearly thinking more about how they will create income in retirement, although few have a written retirement income plan. On average this group expects to live to age 86, so they are generally looking at a 20-year retirement horizon. And only one in five say that leaving an inheritance is very important. Roughly three quarters indicate they have calculated the amount needed to accumulate by retirement, and they have an income plan and emergency funds. However, only one-third of them have a formal, written retirement plan.

How do Americans feel about retirement? Approximately 80 percent of those interviewed are at least moderately confident about their ability to manage investments and that their savings will allow them to live comfortably in retirement. But some are concerned about Medicare and Social Security cuts as well as high healthcare costs. To that end, nearly three in five say that having a monthly guaranteed income in addition to Social Security is very important. However, there is a reluctance to pay for this downside protection: a majority value cash in hand over lifetime income.

Although most economists recommend annuities as the most efficient way to provide a safe base of income in retirement, few financial advisors present annuities to clients. Advisors are important to many of those surveyed. Three out of five report working with a financial advisor. This does not necessarily translate to their awareness of annuities. Only about one third of all consumers and two in five of those with current financial advisors say that an advisor has recommended the purchase of an annuity.

Perception and understanding of annuities

Consumers generally hear about annuities through advisors, plan providers, and financial institutions. These are the most common and positive sources of information on annuities – more likely than from the media. And in terms of the annuity experience for those who have purchased an annuity, they cite guaranteed lifetime income and peace of mind as the drivers. Nearly all annuity owners are at least moderately satisfied with the product. However, only one in five say they are extremely satisfied with their annuity purchase. A majority of annuity owners – two in three – are somewhat or very likely to recommend the product to those close to them.

The challenge, and perhaps surprise, is how little these consumers understand annuities. First, annuities are clearly not as well known as CDs and mutual funds. Even among annuity owners, only one-third say they are very knowledgeable about the product. Second, many are unclear about the nature of annuity. A plurality of consumers view annuities as both an insurance and investment product, while one in seven are unsure how to classify them.

Putting it to the test

Our research was more than just about attitudes. We created a 10-question annuity quiz to gauge consumer understanding about this product. The multiple-choice questions centered on topics such as immediate annuities, variable annuities versus mutual funds, guaranteed monthly income versus systematic withdrawals, the general taxation of non-qualified annuity payouts, and the meaning of a 50% joint and survivor annuity.

The big takeaway is that over four in five failed the annuity quiz. Specifically, the net who passed the quiz (scoring 60% or higher) was 14 percent, and the net who failed was 86 percent. In fact, one in four did not answer any of the 10 quiz questions correctly. It’s interesting to note the demographics that drive the results.

As the annuity quiz chart demonstrates below, there are differences in who is likely to pass than fail the quiz.AnnutiyQuizPassPercentages

What this research tells us

This blog post is only a summary of the findings; we will be providing more detail in future updates. We can, however, state some general conclusions drawn from this research.  

  1. Those who are likely owners or prospects for annuities, i.e. those surveyed, are generally attuned to the retirement income challenge and are dealing with it.

  2. These individuals tend to be either neutral or positive about the value of guaranteed lifetime income, and specifically about the use of annuities.

  3. By and large, people do not understand the specifics of annuities.

We see opportunities from this research. Whenever there is need but not understanding, education is an important solution.  The American College Guaranteed Lifetime Income and Annuity Study underscores that both financial advisors and consumers can benefit from learning more about annuities and how guaranteed lifetime income can enhance a consumer’s retirement plan.

The American College New York Life Center for Retirement Income is a great starting point for this information, and the Retirement Income Certified Professional® (RICP®) designation can be instrumental for advisors who seek to help consumers.