The late 1970’s and early 1980’s introduced the rise of defined contribution plans, and since then many professionals and academic researchers have focused on helping Americans save for their retirement. While all generations have had their ups and downs in this area, overall these efforts have created success in increasing savings rates. This has affected the “accumulation stage” of life and retirement savings, however, less effort has been put towards the issue of how individuals approach the “decumulation” of their assets during retirement. The National Bureau of Economic Research has created a study based on this “decumulation challenge” and the results show why some individuals are annuity averse.
While annuities have been presented by economist as an important role of retirement in the past, demand has continued to be limited. Each day, around 10,000 individuals enter retirement and the savings they have been working towards is called into action*. Instead of continuously saving, a new problem is upon them: how to draw those assets optimally during their remaining lifetime. Since this is not the focus of most individuals still in the “accumulation stage”, financial planners can better educate clients on the role annuities can play in the upcoming “decumulation stage”. To better approach this subject an understanding of concerns consumers have about annuities is ideal.
The findings of the National Bureau of Economic Research offer several practical implications for financial planners who are working with clients to design optimal decumulation plans for retirement. Firstly, the study found that individuals who are less loss averse and consider annuities more fair will be more willing to consider annuity options. Judgments of fairness are affected by the way that profits are shared between the firm and the consumer, the intentions of the firm, the firm’s perceived wealth and power, and whether underlying costs are variable or fixed. If the subjects of the study were affected by their prior experiences with financial planners and the media in relation to how those outlets covered annuity products.
A relatively high percentage of people in the study (20%) did not like annuities strongly enough to say they would never select one. However, this percentage dropped to 16% when more information was provided on the annuity product to help participants recognize the value of the annuity over time. Therefore, it’s clear that personalization of retirement planning to the needs of the individual client is important. While most workers agree on the need to save for the future and will respond well to standard savings tools, certain products like annuities may take more effort to efficiently communicate to clients.
For more information on annuity products and other tools to help your clients see their retirement potential, contact Simplicity Life today! 800.921.3100
*The Pivotal Role of Fairness: Which Consumers Like Annuities?, National Bureau of Economic Research