Are Americans Willing to Pay for Their Own Pension?
November 14, 2014 by
Gary Baker
Each year, the Employee Benefits Research Institute (EBRI) publishes the results of its Retirement Confidence Survey. This annual survey tracks answers to some key questions over time, such as how confident Americans are about the prospects for Social Security and Medicare; how much money have they saved for their future and where are they putting their money; who they turn to for retirement investment information and advice; as well as why individuals are not saving more and what would motivate them to do so. These results, and how they change from year to year, offer interesting insights into investor attitudes, which often correlate to changes in the market and government programs.
In an effort to drill further into attitudes about guarantees like Social Security and the deployment of retirement savings to support a lifetime in retirement, CANNEX has partnered with Greenwald & Associates to develop a new annual “Guaranteed Lifetime Income (GLI) Study.” The initial study has just been completed, and the results from more than 1,000 respondents reveal that retirees with investable assets greater than $100,000 depend on guaranteed lifetime income to cover a majority of their living expenses — 79% on average. In fact, more than 40% of those interviewed rely completely on guaranteed lifetime income sources and do not tap into their investments.
The unfortunate reality for current and future retirees is that employer pensions are less common and the existing benefit levels maintained by Social Security are under attack. In Washington, cuts have been threatened and debated over a Social Security program that many predict won’t be solvent by 2033 in its current form. When they factor in the inevitable increases to Medicare costs that will shift more burden to retirees over time, it’s not surprising that so many Americans are concerned about funding their retirement.
Clearly, if Americans expect to cover most of their retirement expenses with sources of guaranteed income, they are going to have to fund more of this from their own savings. And, the only true guaranteed source of lifetime income comes in the form of an annuity.
The GLI Study measures how much consumers ages 55 to 75 value guaranteed lifetime income, their familiarity with the various annuity products available in the market today and how much they value what an annuity can provide given the commitment required to hold on to these products. Detailed results from each of these three components are then combined to derive a GLI Appeal Index that measures the likelihood of a consumer to own or consider the purchase of an annuity. In 2014, a mere 16 percent of consumers scored highly on the GLI Appeal Index.
The initial 2014 GLI Study revealed some interesting results, including:
- Seventy-eight percent of consumers consider the use of an annuity in addition to Social Security to be very valuable. Those who expressed the greatest appreciation for guaranteed lifetime income’s value include women, those with lower assets (less than $1 million), those who rely on others for investment decisions, and those who remember an advisor discussing annuities.
- Few consumers understand how annuity products can be allocated to support their overall retirement portfolio. For example, providing the flexibility to increase their exposure to equities, or giving them greater opportunity to grow their other investments.
- Most consumers don’t understand the differences between various types of annuities. Only three in 10 consumers said they are highly familiar with fixed annuities, compared to two-thirds of consumers who say they are highly familiar with mutual funds.
Although traditional fixed annuities enjoy the most familiarity, from the table below, you can see that fixed indexed annuities (with or without a withdrawal benefit) rank lowest, along with immediate income annuities. So it’s really no surprise that mutual funds are by far the most familiar products among consumers.
However, in one part of the survey, respondents were asked to evaluate the following series of four retirement income strategies for a 60 year old with $500,000 in assets who will be retiring in five years:
- Invest $100,000 in a deferred income annuity and $400,000 split between stock and bond mutual funds (with guaranteed annual payments of $7,800 starting at age 65).
- Invest $100,000 in a variable annuity with a guaranteed lifetime withdrawal benefit and $400,000 split between stock and bond mutual funds (with guaranteed annual payments of $6,000 starting at age 65).
- Invest $100,000 in a fixed indexed annuity with a guaranteed lifetime withdrawal benefit and $400,000 split between stock and bond mutual funds (with guaranteed annual payments of $6,500 starting at age 65).
- Invest all $500,000 in a mix of stock and bond mutual funds. There would be no guaranteed income, but income could be drawn from gains on the investments.
As evidenced by the chart below, the investment-only strategy was the least appealing. The fixed indexed annuity with a guaranteed withdrawal benefit rated higher than the variable annuity strategy, largely due to the general competitive positioning of both products today. Interestingly, the deferred income annuity ranked third even though it provided the highest guaranteed payout.
Overall, the GLI Study tracked a number of responses involving consumer concerns and goals in retirement, their attitudes about lifetime income and their use of annuities as a supplement to Social Security. Based on the results, it’s clear that consumers appreciate the benefits that annuities can deliver but don’t fully understand the variety of products available and could therefore benefit from more effective education and advice. This new annual study, along with a measurable index, should help raise awareness among consumers and help our industry devise more effective methods of presenting and supporting the allocation of annuity products for clients.
The GLI Study was underwritten by Guardian Life, MassMutual Financial Group, MetLife, Pacific Life, Protective Life and Voya Financial. To obtain copies of supporting material for the GLI Study, visit http://cannex.com/usa/english/products_gli.htm or http://greenwaldresearch.com/health-wealth-blog
Originally Posted
at
NAFA Annuity Outlook on November 2014 by Gary Baker.