How would you like to have a guaranteed stream of income in retirement? Most people would jump at the opportunity. How do you feel about adding an annuity to your retirement portfolio? According to a recent InvestmentNews article, fewer would be interested in this option. While annuities have been around for thousands of years, many still aren’t sold on them, in large part because of the name.
A recent study of over 1,000 Americans over the age of 30 found that people were more likely to buy a product that is called a “guaranteed stream of income” as opposed to an annuity.
A recent survey of more than 1,000 U.S. residents over the age of 30 found that calling products a “guaranteed stream of income” made people more willing to buy them and to put more of their money in, versus when the product is called an annuity. That report, published last Friday by Morningstar, found a nearly 2% variance in preference for annuities when they were labeled guaranteed income.
“People are more open to guaranteed income than an annuity,” said Stan Tregar, a behavioral scientist at Morningstar, where the research was first published.
The survey also found that people strongly prefer immediate annuities over the deferred variety, at 78% to 22%. However, when participants were prompted to consider the possibility of running out of money in retirement, the preference for deferred annuities jumped by more than 8%. Other studies have also found a negative stigma attached to annuities.
This is not the only research that has found that people are not fond of the word “annuity.” Other surveys have associated a negative stigma with them.
“They’ve had a lot of historical issues with fraud, which has not totally gone away, although they are more regulated than they have been in the past,” said Jasmin Sethi, associate director of policy research at Morningstar. “Annuities are not used very much today.”
On the flip side, guaranteed income offered through annuity products has the potential to make people happier.
“People like to know how much they can spend. They like to not have to guess,” she said. “People also have a very hard time dealing with longevity risk.”
Many people steer clear of annuities because of their complexity and a lack of transparency. They also aren’t available in most workplace retirement plans which also keeps them from being used more.
“Having guaranteed income products included within a retirement plan’s qualified default investment option, such as a target-date fund or managed account service, would make them much more accessible,” Sethi added.
Written by Rachel Summit