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Why Retirees May Be Reluctant to Embrace Annuities

Updated on March 5, 2010

A Push for Annuities

March 5, 2010

The March 1, 2010 issue of the Wall Street Journal included their monthly personal investment update section.  Page R4 of that section contained a long article entitled Making Your 401(k) Last, by Tom Lauricella, which which focused on a discussion of converting 401(k) savings into annuities. 

Annuities have become very popular with politicians, financial advisers and other self styled experts as evidenced by the number of articles endorsing them.  The March issue of Money Magazine had two short articles on the wisdom of annuities in retirement.

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Annuities are a great product and should be considered in one's retirement planning but, like everything else, there are not an automatic fix for everyone's retirement plan.

As the Baby Boom generation rapidly approaches retirement, politicians, self styled experts and the media have all suddenly discovered annuities and have decided that a guaranteed monthly income for life is just what the retiring boomers need.

The problem is, no matter how they package and pitch annuities, the majority of people are not buying.

Don't get me wrong, annuities are a very good product and investing in one can be a wise retirement planning choice.

As I explained in a previous Hub, Using Annuities to Guaranty Retirement Income for Life, an annuity is basically a reverse life insurance policy in which, instead of making small monthly payments in exchange for your beneficiary receiving a large sum of money if you die as occurs with life insurance, an annuity requires that you give the insurance company a large sum of money up front in exchange for a guaranteed monthly check for the remainder of your life.

As one of my finance professors put it, with life insurance you are, in effect betting that you are going to die soon while the insurance company is betting that you will live a long time. The reverse is true with an annuity as you are betting that you are going to live a long time, thereby getting more back than you paid in, while the insurance company is betting that you will die soon thereby allowing them to keep most of your money. The reality is more complex but this little joke captures the essence of the two products.

Despite the advantages of an annuity, and there are many, for a retiree, most people are reluctant to purchase one with their retirement savings.  So reluctant in fact that many of those supporting annuities are looking for ways to force people to invest in annuities for retirement.

The Wall Street Journal article makes this point early on saying Many investors just don't seem to want these annuities – even if a bevy of financial experts say that the products are in their best interest.  The article then goes on to list some of the reasons why the experts feel people are reluctant to invest in annuities and these include:

–                   people distrust annuities because historically the high commissions paid to annuity sales people resulted in high fees to the buyers of annuities.

–                   People fear turning all or most of their retirement savings over to an insurance company with no or very limited options for getting it back other than in the monthly payments.

–                   People fear they will die long before getting all but a small portion of their money back (and unlike stocks, bonds and CDs in an IRA or 401(k), the insurance company generally gets to keep the balance of the money not paid out in monthly income payments).

Another argument that was previously made was inertia or the fact that people were too lazy to give thought to their retirement needs so they simply let their money sit in more traditional investments instead of following the experts' advice and putting the funds into an annuity. 

However, when some 401(k) plans took the step of automatically enrolling workers in an annuity and investing all or part of the employees contribution in the annuity unless the employee opted out, most opted out even when that required their overcoming some roadblocks the plan put in the way of opting out.  Thinking differently than what experts are recommending is not automatically a sign of stupidity or laziness.

As a baby boomer approaching retirement myself, I find it interesting that this article and the others pushing annuities haven't looked at the history of the past half century for clues to this reluctance, on both the part of both the boomers and their children, to pour retirement funds into annuities.

The first is inflation.  Just as the Great Depression of the 1930s did much to shape the financial thinking of my parents and grandparents generation, so too, has inflation had an influence on our financial thinking. 

A major weakness of annuities is the fact that with a basic annuity the monthly income is fixed and, when inflation occurs the purchasing power of that income will decline leaving the annuitant with less and less spending power each month.  While the monthly payment will continue to arrive unchanged in terms of the amount every month its purchasing power will depreciate steadily and this has the same effect as cutting the payment.

Worse still, when income taxes are taken into consideration, the taxes will remain the same while the value of the income decreases.  On the other hand, if the individual had left the money in the 401(k) and a market crash caused the value of the securities to fall, as happened during the 2008 crash, the individual would also have to reduce their monthly withdrawal, thereby reducing their monthly income, in order to conserve their funds.  However, by withdrawing a lower amount (which is, in effect, reducing their monthly income) their income taxes would be less. 

The second possible concern, which the article did touch on, is trust.  People are living longer which means first, that they have experienced considerable change in the world during the 60 to 70 years before they retire and, second, a healthy person faces the possibility of living as much as twenty, thirty or even forty years after retiring. 

Mathametically, annuities are a very safe investment.  There is no reason why a lump sum payment can be converted into a guaranteed monthly income for life.  So long as the insurance company issuing the annuity invests the funds conservatively and uses a conservative interest rate and good actuarial data when calculating the promised payment there is no reason why the purchaser of the annuity cannot expect to receive the promised income for life no matter how long he or she lives.

However, this assumes the funds are managed well and the company issuing the annuity is financially sound.  While many life insurance companies have solid, conservative reputations and have been in business for a century or more there are newer companies in the market which, while well run, have not stood the test of time. 

While life insurance companies survived the 2008 financial crisis in good shape there was a week or two during the height of the crisis when fears were raised that some of them might encounter serious problems and need bailing out (they are, after all, big investors in the mortgage market).

Despite the fact that life insurance companies have weathered financial storms well during the lives of the boomer generation, other aspects of life have changed drastically over this period.  Companies, whole industries and even nations and empires have disappeared since our youth. 

Even more disturbing has been the loss of pensions.  Many of us lost employer paid pensions due to voluntary or involuntary (due to downsizing) exits from our jobs.  While a blow to future plans, the immediate impact was minimal as we found other jobs.  However, we did quickly embrace 401(k) plans, in which ownership rested with the employee and not the employer, when they came out.

It is this segment of the population, people approaching retirement who have 401(k)s and/IRAs with large balances who are one of the target markets for annuities (the other target is young people early in their careers).  To get any type of reasonable monthly income from an annuity, a person generally needs to invest $100,000 or more which, for many people approaching retirement, represents their entire retirement savings.  This requires a large degree of faith and trust especially for people who have already had the system fail them.

More significant are the experiences of current retirees who, ten or twenty years into retirement, have suddenly had their monthly payment cut.  This is especially true of retired union workers in industries like steel, airlines and automobiles who were promised large pensions only to have the employer behind the pension file for bankruptcy and shed the pension whereupon the U.S. Pension Guaranty Corporation came to the rescue and saved the pension but had to reduce the monthly payment.

Let me emphasize right here the pensions and Social Security are not annuities even though they act like annuities in that they promise an income for the remainder of a person's life.

Observing the fate of underfunded employer sponsored and controlled pensions (especially the old fashioned employer paid plans) and Social Security which is rapidly approaching insolvency and the only question in most people's minds is when, rather than if, it will fail, makes many people hesitate to turn over and lose control over a working lifetime's worth of savings.

These experiences, plus the fear of inflation which this generation has experienced first hand, are probably at the root of much of their reluctance to embrace annuities. 

Of course, a final factor, also not considered, is the boomer generation's love of independence.  Most of us don't like being told what to do and that includes being told what to do by self-appointed nannies.


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    • profile image


      8 years ago

      I would do annuities either, bt they would be good for widows & someone.

      best hub, tks

    • bobmnu profile image


      9 years ago from Cumberland

      I have what I think is a balanced retirement. I have a pension, IRA, Stocks, gold and an annuity. I Annuity as one part and plan to use it as investment income until I am not working part time. My financial advisor suggested a broad balanced portfolio. He does not deal in stock or gold but suggested I continue to invest in those. He also suggested an investment plan that would convert to an annuity at a later date.

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      9 years ago from Tucson, Arizona

      Arlyn Gomez - Thank you for your comments.

      First of all I would like to reiterate what I said in the Hub and in some of my responses to comments in the comment section and that is that while I believe that annuities can be a good retirement planning tool they don't work for everyone and my main objection is to the idea that people should be forced to invest in them.

      As to your other points:

      First, unless the insurance company is subsidizing its annuities by using income from other products to pay agents' commissions, the funds for the commission have to come either directly or indirectly from the people buying the annuities. If the commission is coming directly from the buyer that means that its is subtracted from the initial investment (which is the way most life insurance commissions are paid by subtracting from the first year premium payment). If it is coming indirectly from income generated by the investment then it is still being paid by the buyer since investment income that is retained by the company for its expenses, including agent commissions, and its profit then it is money being deducted from the buyer's income. Don't get me wrong, there is no such thing as a free lunch and expenses, including agent commissions, have to be paid and the company has to make a profit if it is to provide the service the buyer's want. However, if commissions are high, and they were among the higher commissions when I worked as an agent selling these products, then potential buyers have a right to be concerned about the effect of these higher fees when buying (and this is NOT to imply that the commissions are not justified).

      Second, you are correct in stating that inflation protection, death benefits and other optional extras are available to protect against many of the risks that I discussed in the Hub. However, these are not free. There is a charge for them and that charge is in the form of lower monthly income - for a given investment, the more options taken the lower the monthly income amount. Check your price quote schedules and you will see this decrease in monthly income with each additional option selected.

      Again, annuities can be a good investment and these additional options you cite (and which I was aware of at the time of writing this Hub but because of space limitations couldn't discuss every add on and modification available with traditional annuities) can be attractive and provide protection against some of the risks I discussed. However, the add on features are not free and it is up to each individual to decide for themselves whether or not annuities are the right retirement investment for their individual needs.

    • Arlyn  Gomez profile image

      Arlyn Gomez 

      9 years ago from Miami, Fl

      Annuities have adapted and come a long way since the great depression.

      First, the agent that sells it to you doesnt make comission from your money, the commission is paid by the ins company (their investment returns, their solvency, etc). Depending on the KIND of annuity dictates whether there will be management fees (for instance variables).

      Second you CAN have your payments keep up with inflation, they can continue to grow with certain riders that allow your principal and income to continue to grow and you can lock in the gains each year, helping you stay with the pace of inflation.

      Annuitizing is not the only way to generate income. you do not have to lose control of your money, you can now purchase special riders that give you access to income but still the ability to walk away with your accumulation amount.

      And you CAN leave the full amount to pass on to your family, even if you start income. Just add a death benefit.

      I think the potential of what annuities can do is highly underestimated in this hub. Do your research on the options you have out there before deciding how you feel about them. they are not all the same, not all companies are the same. and not all advisors know what they are talking about. I know, I am one, and I work with seniors everyday and have never lost sleep at night, all my clients are situated well.

    • Trunfio profile image


      9 years ago from Pacific Northwest

      Great hub and I have always shied away because of high fees. Now I have some food for thought. Thanks!

    • drbj profile image

      drbj and sherry 

      9 years ago from south Florida

      Annuities are not very well received in my part of the world either, and I notice insurance salespeople getting more and more aggressive in attempts to sell them to retired folks.

      Thanks, Chuck, for a very explicit and comprehensive summary of this investment vehicle.

    • Darlene Sabella profile image

      Darlene Sabella 

      9 years ago from Hello, my name is Toast and Jam, I live in the forest with my dog named Sam ...

      Great Hub Chika, Could you please come over hear and help me for a while, your buddy chuck as taken over the advantage buy make you work. Now it is my me okay? Now for this hub my dear friend, great job and thumbs up...

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      9 years ago from Tucson, Arizona

      De Geek - In answer to your question, while I tend to be skeptical along with a little dose of healthy cynicism, I respect those who are considered to be experts in a particular area. I tend to solicit their advice and will often follow their advice.

      What I don't do is let them make decisions for me. I always evaluate what they have to say and then make my decision. It has always been my belief that most people are capable of deciding what is best for them even when it runs counter to expert belief. I have always, in addition to being passionate about maintaining my own freedom and independence, believed that others also know what is best for themselves and value their independence as well.

      While I know that there are some stupid and/or lazy people in the word most people make rational decisions based upon their circumstances and information available to them. As I pointed out in my Hub Serving a Few Cookies Can Accomplish a Lot ( ) when the creation of the Automatic Clearing House (ACH) enabled people to use electronic transfers rather than having to deal with paper checks many of us embraced it as a great time saver and assumed everyone would do the same. But some found the old way more advantageous to their needs and didn't use the new system

      The problem with the current push to embrace annuities is not, in my opinion, the product itself or even the advice but the growing belief among many of those pushing this idea that it is ignorance that is preventing everyone from converting their retirement savings to annuities. The solution, according to the pro annuity crowd, is to force people to put their money into annuities either by structuring 401(k) accounts so that the money automatically goes to an annuity unless the individual goes to the effort of opting out or by having the government mandate that retirement funds be invested in annuities (I believe that new regulations in the United Kingdom require people to move their money to annuities by age 75 or face harsh tax penalties). It is this Progressive Era true believer mentality behind the advice that I object to and not the advice itself.

    • ntweisen profile image


      9 years ago

      Very interesting hub!

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      9 years ago from Tucson, Arizona

      Ralph - you are right about many people wanting to leave something for their heirs and with annuities one can generally not do this.

      As to the fees, they do tend to be high especially with variable annuities which are a rather different product in many respects. I worked as an agent selling insurance and mutual funds for a while and annuities, especially variable annuities, were great to sell because of the high commissions paid on them. Even the WSJ article I discussed mentioned this reputation for being expensive in terms of the fees involved as one of the factors they assume are deterring people from purchasing these products.

      Thanks again.

    • Chuck profile imageAUTHOR

      Chuck Nugent 

      9 years ago from Tucson, Arizona

      Paradise 7 - a Depression (which is usually associated with deflation where value of money appreciates and its purchasing power increases as opposed to inflation which most of us are more familiar with) is a good time to have an annuity as you do continue to receive a regular monthly income with good purchasing power. The problem is that the insurance companies can fail and you will lose the income. This is why you need to make sure that the insurance company issuing the annuity is solid and conservatively managed.

      But again, when we are considering time frames of up to thirty or forty years it is difficult to know how well a company will be managed that far in the future which naturally leads to reluctance on the part of people to invest their entire retirement savings in an annuity. If one can afford it, putting some money into an annuity can be a very good idea but you need to invest a large sum to get any kind of decent monthly income from it and this usually requires that the average person approaching retirement has to invest everything in the annuity.

    • De Greek profile image

      De Greek 

      9 years ago from UK

      Nan Mynatt's comment above reflects what I want ed to say about this. You refer to 'experts' with some faith in their abilities, or did I misread? :-)

    • Pamela99 profile image

      Pamela Oglesby 

      9 years ago from Sunny Florida

      Chuck, My mother has an annuity but it hasn't really done as well as they said. I wouldn't invest in one at this time but I appreciate your article as I understand them a lot better now. Thanks.

    • eovery profile image


      9 years ago from MIddle of the Boondocks of Iowa

      I would do annuities either, but they would be good for widows and some other people.

      Keep on hubbing!

    • Nan Mynatt profile image

      Nan Mynatt 

      9 years ago from Illinois

      I sold annunities for 12 years. They are sold from insurance companies, they went under during the recession, depression. Hide you money in an metal box.

    • Ralph Deeds profile image

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      I've never investigated annuities, but I seem to recall reading somewhere that there can be a substantial up-front commission paid out of your funds to the individual who sold you the annuity. Of course, that may also be true of load mutual funds and other investments. However, it is not true of no-load, low cost, tax efficient index mutual funds like those offered by Vanguard.

      A factor which may cause reluctance to buy an annuity is the desire to leave something to one's heirs. Of course one doesn't have to put one's entire assets into an annuity.

    • Paradise7 profile image


      9 years ago from Upstate New York

      Interesting hub. I think Hartford annuities are the best, if you are going to make that kind of financial commitment. The Hartford Company was the only US company to weather the Great Depression and keep paying out the monthly payments in the 30's. A lot of investment firms failed at that time, leaving the retirees without their money and without their payments, either. I think that's why most people won't buy. They want to maintain control of their larger resources during uncertain financial times.


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