Investment professionals are underestimating their clients’ interest in a source of secure retirement income — annuities, according to a new study.
The Protected Retirement Income and Planning Consumer Report, issued by the nonprofit Alliance for Lifetime Income (ALI), surveyed both consumers and investment professionals and found a disconnect in attitudes about retirement assets.
The report found that more than 93% of investors believe protecting retirement assets is important, compared with 78% of financial professionals. The study defines investors as people who have at least $150,000 in assets, work with a financial professional, and are age 45 to 72.
More striking was disagreement over who brings up the topic. According to the study, 73% of financial professionals say they bring up asset protection, but only 33% of investors say financial professionals raise the subject.
Similarly, nearly 50% of investors are “extremely interested” in owning an annuity, but only 19% of financial professionals say their clients have this level of interest, the study reported.
Many financial advisors have believed that annuities are too expensive and too complicated, and that they can manage investments to produce the income streams that clients need. Low interest rates had also made some advisors question the value of annuities. However, as interest rates have increased as a result of the Federal Reserve’s action to tame inflation, so have rates on annuities, and sales have jumped.
Behind the disconnect
Two reasons are contributing to the disconnect between clients and advisors when it comes to annuities, said Jason Fichtner, an ALI fellow, and head of its Retirement Income Institute, in an interview with Rethinking65.
“One, there are some retirement security professionals who actually don’t understand annuities very well. That’s part of it. Now. I’m not saying all of them, but that’s part of it.,” said Fichtner, who believes the main drawback of annuities is their complexity.
Two, not all kinds of advisors are sitting down at the same rate to have conversations with people about annuities, he said.
The study showed which kind of firms are more likely to be having those conversations, based on their increased sales of annuities in the past 12 months:
- National broker-dealers: 41%
• Insurance brokers: 39%
• Regional broker-dealers: 26%
• Independent broker-dealers: 24%
• RIAs/IARs: 21%
Fichtner maintained investment professionals need to do a better job of discussing their clients’ concerns. Annuities remain a relatively small part of total U.S. retirement assets. As of March 31, annuity reserves were $2.2 trillion, or about 6.2% of a total $35.4 trillion in retirement investment assets, according to the Investment Company Institute, an industry association.
Who needs annuities
Fichtner offered some caveats on annuities.
“Can annuities be useful for everybody? The answer is yes. Does everyone need an annuity? The answer of course is no. It is somewhere in between.”
People on opposite ends of the wealth spectrum — those with little or no retirement savings, and the ultra-wealthy — probably don’t need annuities, he said. But for those in between, annuities make sense, he said.
“Who’s most likely to benefit? … A wide swath of the middle class of Americans, who really, in some ways, have often lived paycheck to paycheck when they’re working. But they’re not wealthy enough that they can just go take six months off every year and vacation. This is really a middle-class American issue,” Fichtner said.
Despite his endorsement of annuities, he offered a caution when asked if investors should place all their retirement eggs in that basket.
“The two answers I would give is, one, always talk to a financial professional before making any kind of these decisions. The second is, I’m a big fan of diversification in general, diversification of a portfolio when you are saving for retirement, and a diversification of your assets when you are in retirement, and that diversification should include additional protected income strategy. … So, I wouldn’t go with ‘do it all or do nothing,’ but do it as part of a diversified portfolio.”
‘Our peak 65 moment’
In addition to his roles at ALI, Fichtner is vice president and chief economist of the Bipartisan Policy Center, a Washington think tank that encourages cooperation between Republicans and Democrats. He served in the Social Security Administration from 2007 to 2010 in roles including chief economist and acting deputy commissioner.
Fichtner said rapidly changing demographics are making retirement investment more important than ever. “Keep in mind that this is basically the first generation we’re going to have 1,200 people a day turning 65 next year. That’s what we call our peak 65 moment,” he said.
“And so that creates a whole new challenge, making sure people have retirement security, the finances they need to withstand retirement to make sure they don’t outlive their savings. And that’s where financial advisors also come into play now, because we’re moving away from an environment in which you got a paycheck at work, got a pension, and that pension was your paycheck in retirement,” he said.
Fichtner said sales of annuities are increasing, a trend he attributed to investors’ concerns about issues including inflation, the 2022 stock meltdown, the recent federal debt ceiling standoff, and the looming Social Security solvency crisis.
Additional Reading: Another Record-breaking Quarter for Annuities
“When we talk about finances, everyone likes to talk about certain types of questions. There’s market risk, a sequence-of-return risk. No one really wants to talk about political risk,” Fichtner said.
“Social Security trust funds are estimated to be depleted in 10 years — 2033, 2034, give or take a year or two depending on how things continue to go. That is a risk index. If nothing is done — and we see how good Congress is at doing nothing — if nothing is done, the default is roughly a 20% to 25% reduction. So it’s pretty bad; it’s across the board,” said Fichtner, who in May testified before the Senate Budget Committee to urge resolution of the debt ceiling standoff.
“I don’t want to take a bet on what Congress is going to do,” he told Rethinking65.
“There’s been this extremist polarization that seems to be getting worse and you have one party, a small number of a party that seems to be able to demand some decisions and push brinksmanship to the very end, whether it’s on debt ceiling and potentially a government shutdown.
“Will they do that to Social Security when it gets to the 2030s? Will retirees be at risk of seeing a reduction in their Social Security payments? If you think there’s a slight chance or a big chance that that answer is yes, we should start planning today for people’s retirement to include more protected income outside of Social Security.”
In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.
