Financial advisors are fielding more concerns from clients who worry about outliving their savings. A June 2023 Cerulli Associates report found that Social Security is the primary income source for 54% of those surveyed, and 58% of retirement savers – including retirees – fret that their assets will run out and leave them struggling.[1]
These concerns have sparked a renewed interest in annuities to provide additional income for part of a client's retirement portfolio.
The need for additional guaranteed income protection is increasing for several reasons. People live longer, and fewer have a company pension plan as protection. Stock and fixed-income markets have been volatile over the past several years. Questions remain about the solvency of Social Security in the coming years, as the main trust fund will pay only 77% of its scheduled benefits by 2033 if legislators take no action.[2]
Annuities can solve this problem for many retirement savers, but financial advisors find their clients lack interest in these products, even as they ask for safer portfolios and income protection.
For advisors, helping clients understand the annuities puzzle and explaining how changes to these investment products are making them more attractive for those ready to retire is critical.
The Annuity Puzzle
There are multiple reasons why clients remain skeptical about annuities, including news reports and state insurance department alerts about deceptive sales practices when purchasing annuities. High fees and pricey surrender charges also may act as a turn-off. Finally, many annuities are opaque and complicated, making it difficult for the average investor to know what they are buying.
In some cases, even wealthier clients might still need to learn annuities exist.
A 2023 paper by Karolos Arapakis and Gal Wettstein, economists at the Center for Retirement Research at Boston College, suggests advisors tend to refrain from recommending annuities to clients.[3] The researchers found only about 10% of older Americans own commercial annuities. Similarly, the Federal Reserve's 2023 Survey of Consumer Finances shows fewer than 5% of American families owned an annuity in 2022.[4]
A Morningstar report suggests some advisors are hesitant to include annuities in their offerings, noting there is no federal standard on annuity advice.[5] Even if some advisors want to integrate annuities into portfolio advice, they might need help managing annuities. According to Barron's, advisors who use wealth platforms designed solely for managing investments rather than insurance products cannot view those as part of a client's portfolio.[6]
Positive Changes Are Coming
Times are changing. Advisors now have more tools to solve the annuities puzzle, empowering their clients to attain the guaranteed lifetime income needed for a secure retirement.
The Center for Retirement Research at Boston College report finds that advisors should be more proactive about demystifying annuities by explaining what these investments are, who sells them, how to contact providers, and how to sign the contract.
Morningstar’s report, which looks at guaranteed-life premium annuities, notes advisors can compensate for the lack of a uniform advice standard for annuities by following fiduciary rules or the U.S. Securities and Exchange Commission’s Regulation Best Interest.
The research firm concurs with the Boston College suggestion that advisors can address client concerns about these products by reviewing terms for opting out and ensuring clients understand annuity surrender charges. For clients who worry that the insurance company will come out ahead financially if they buy an annuity, Morningstar notes that advisors can add a death benefit rider, which can reframe that particular concern. To reassure clients, they can also fall back on fiduciary rules or the SEC's Regulation Best Interest.
Technology is also making it easier for advisors to offer and manage annuities after years of dealing with tedious paperwork forms. The Insured Retirement Institute, a trade association for the insured retirement industry, notes it is moving to a digital-first strategy to allow a faster, modern, streamlined process consistent across the industry for financial professionals and consumers by creating standardized rules of engagement for how the industry delivers essential data.[7]
Some advisors are beginning to embrace annuities and convincing clients to lock in current high fixed-income yields now that the Federal Reserve appears to be at peak interest rates. Limra, an annuities industry organization, reports U.S. annuity sales posted a record high in 2023, powered by fixed annuity sales.[7] That report cited investor concerns about a possible equity-market downturn and strong interest rates “prompted investors to lock in crediting and payout rates offered in fixed annuity products."
By addressing concerns about annuities and explaining how these investments add guaranteed income protection, advisors are well-positioned to help clients improve and strengthen their retirement portfolios.
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[1] For Retirement Savers and Retirees, Outliving Assets Is Their Greatest Fear, Cerulli Associates, June 8, 2023
[2] Summary: Actuarial Status of the Social Security Trust Funds, U.S. Social Security Administration, March 2023
[3] Do Financial Professionals Recommend Annuities?, Center for Retirement Research, Dec. 19, 2023
[4] Changes in U.S. Family Finances from 2019 to 2022, Board of Governors of the Federal Reserve System
[5] How Can Advisors Help Assemble a Secure Retirement Income Solution?, Morningstar, Nov. 1, 2021
[6] Annuities Can Be Tricky for Advisors to Buy and Manage. How Insurers Hope to Change That, Barron’s, Aug. 28, 2023
[7] Digital First for Annuities, Insured Retirement Institute
[8] U.S. Annuity Sales Post Another Record Year in 2023, Limra, Jan. 24, 2024
