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Americans Lack Understanding of How Annuities Guarantee Lifetime Income

TIAA found that many Americans are unprepared for retirement in their 2016 Lifetime Income Survey. They have false confidence in where their retirement savings will take them and are not aware of the annuity products that could secure their financial safety in retirement. In the Plan Adviser article “Many Have Unrealistic Expectations for Retirement Savings,” Karen Wittwer talked about the results of TIAA’s survey of 1,000 adult Americans. They certainly aren’t the first researchers to find that Americans are more confident about their retirement than they should be, but TIAA’s research goes along with what some financial firms have been saying for years. More than half of the respondents are confident that their retirement savings will last for as long as they live, but many of those don’t even know the value of their retirement account. Interestingly, only 35% of people knew how much income they would be receiving in retirement. That is really where the disconnect lies: creating income from their retirement savings.

The majority of respondents think that 75% of their current income will be more than enough to sustain them in their retirement years, but experts say that number is realistically closer to 100% that they will need. Experts also recommend saving between 10-15% of your income towards retirement, but 41% of people are just saving 10% and the rest are saving less. When asked if they would rather receive a lifetime income paycheck in retirement or a new car or unlimited airline tickets every year, 68% of people chose the paychecks. While that is the majority, it is shocking how many people didn’t choose that option! Only 43% of those questioned said that they would use a portion of their retirement savings to guarantee monthly lifetime income. This was even after the researchers mentioned the possibility of running out of money in retirement. If less than half of survey respondents are willing to purchase an annuity to guarantee income in retirement, how many are actually making the purchase? Far less.

It’s certainly important to save as much as you can for your retirement years, but it is just as important to turn that savings into a lifetime stream of income that you cannot outlive. One of the only sources of guaranteed lifetime income is annuities. TIAA, who sells annuities, employer-sponsored retirement plans and IRAs, found that 66% of respondents were unfamiliar with annuity products. Only 10% of them currently own an annuity product and only 23% of people have a favorable opinion about annuities. Of those surveyed, 68% of people don’t plan to purchase an annuity at any point in their lifetime. TIAA’s President and CEO recommends sitting down and determining your future expenses then ensuring that your have guaranteed income to cover those costs. Buying an annuity with some of your retirement savings ensures that you will be able to pay your bills through retirement.

The problem does not lie in people disliking annuities for the most part, it is actually a lack of knowledge and understanding about how annuity products work. Of those who knew about annuities, 43% had a favorable opinion versus 12% of those unfamiliar with the products. Seventy-five percent of the people unfamiliar with annuity products had either a neutral opinion of them or said they didn’t know how to answer. This shows that there is a strong need for educating consumers about the types of products that can save their retirement. Millennials were the generation that was least aware of annuities, only 20%, while 38% of Generation X and 41% of Baby Boomers had familiarity with the products.

Baby Boomers plan to rely heavily on Social Security to get them through retirement while Generations X and Y plan to rely mostly on their own retirement accounts. Just over half of respondents plan to draw down from a defined contribution plan in their retirement, while 29% will draw down from a defined benefit plan. Thirty-three percent of people said that their employers offer retirement plans that have an option for monthly income payments. For the 67% of plans that don’t offer a monthly income option, 56% would like that option to be added. Well over half of the people would rather have the option to purchase an annuity through their employer rather than find one on their own. TIAA hopes that more employers will start offering annuities and educating their employees on the benefits of a guaranteed lifetime income stream option. It’s confusing to plan for retirement, but people trust their employers and hope to learn from them and be given the information and tools they need for a successful financial future.

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