When I retire, in about 40 years or so, I plan to have some type of annuity as a component to my overall investment strategy. In addition to my company sponsored 401(k), my Roth IRA and my hobby of messing around on E-Trade (which I have to admit I am about as dismal at as I am at my other hobby, golf) I will buttress my portfolio with an annuity.
That will be the case for many people of my generation as they do not know what an annuity is or how one works. And the few that do have their information muddled and riddled with misconceptions. You may say: Well, that is the job of the financial advisor. It is their responsibility to educate and relay important retirement options to the investor. And you would be correct, but not completely. People in the medical profession are constantly reminding people what is good for them and many never heed the advice. A persuasive campaign is needed to explain to people why they should stop smoking instead of just finger-wagging from a doctor.
When I ask educated professionals of my generation about annuities they automatically equate them with structured settlements that arise from some type of accident. And when J.G. Wentworth, the equivalent of a life settlement for annuities, is the most known name in the industry among a whole generation of the general public, there is an issue that needs to be addressed.
This is not the first time that I have thrashed the industry for being too insular and short-sided. For all of its advancements over the last few years (its enthusiastic embrace of social media, the constantly improving diversity of its workforce and the successful public relations outreach to the general public regarding retirement preparedness), they have glossed over an important fact. Yes, people need to start preparing for retirement earlier, but one of the products that you sell to mitigate against longevity risk and insufficient retirement planning is either unknown or misunderstood to younger generations.
And it is not only Millennials. Many in older generations remain confused and skeptical about what annuity products can do for them; this, at a time in their lives when retirement should be their main financial focus.
Those who are aware of what the products do and how they can work for them in retirement have misconceptions that make closing an annuity sale an arduous task.
As reported by LifeHealthPro.com’s sister publication, AdvisorOne, and the research of Israeli economist Menachem Yaari, economists have realized that retirees should annuitize much more of their income than they do and the fact that they do not has become known as the “annuity puzzle.”
The AdvisorOne article quoted Franco Modigliani’s Nobel acceptance speech where he said: “It is a well-known fact that annuity contracts, other than in the form of group insurance through pension systems, are extremely rare. Why should this be so is a subject of considerable current interest. It is still misunderstood.”
Modigliani uttered that phrase in 1985 and the fact that little progress has been made, especially as droves of baby boomers prepare for retirement signifies an industry unable to articulate the importance of one of the main products they profess to believe in.
So, how does the industry solve the annuity puzzle? The same way any puzzle gets solved: You get it together. Carriers within the industry have adept and capable communications teams staffed with professionals that can deftly convey a message. We know that they can advertise successfully. For example: An older friend of mine was startled after seeing a Prudential billboard stating that you should have enough in your retirement fund to live until 93. We happened to be driving over the Pulaski Skyway in New Jersey at the time and I thought we might veer over the guardrail.
I hear members of the industry speak ad-nauseam about how their products are perfectly suited to protect against longevity risk and the ominous specter of an underfunded retirement that so many Americans are scared to death about. People are listening, and, for the most part, people are ready to purchase these products. Carriers should join forces and roll-out an expansive public relations campaign explaining and dispelling myths about annuity products. When the general public has some general knowledge, producers will be able to sell a lot easier and people will be able to sleep a lot easier knowing they have a comprehensive retirement plan.