Last year, the Government Accountability Office (GAO) published a report on the state of retirement security in American households. According to the GAO, about half of households age 55 and older have no retirement savings.
Many are relying on Social Security for income in retirement. In fact, for those age 65 and older, Social Security makes up an average of 52 percent of household income. Consider these facts for a moment and now add this to the mix:
The average American household has $15,355 in credit card debt.
The average household has $47,712 in student loans, $26,530 in auto loans and $165,892 in mortgages.
When it comes to household finances in America, the picture isn’t pretty. The good news is that it isn’t too late for people to get their house in order.
What the data shows is that people may need more support in developing a plan that sets them up for long-term financial success — including a secure retirement. For plan sponsors and financial advisors, this is an excellent opportunity to educate individuals about available retirement income products and resources so that all employees are well positioned to meet their financial goals.
One of those products is annuities, yet many plan participants are unaware or misinformed of their value. Simply put, annuities can help round out any retirement savings strategy by generating a stream of income that participants cannot outlive. And with life expectancy on the rise, having that extra money could mean the difference between participants living out their retirement dreams or dealing with financial hardship in their golden years.
Annuities are frequently given a bad rap as a retirement product that does more harm than good. Many say they are too inflexible and too expensive. Others believe that annuities are in low demand and place too much fiduciary responsibility on plan sponsors and their advisors.
Of course, plan sponsors, advisors and participants should all do their due diligence when it comes to researching and understanding annuities. There are pros and cons to any investment option, but with annuities, individuals may find the benefits outweigh the drawbacks. It’s time to debunk these myths and separate fact from fiction:
• MYTH 1: Too inflexible
When combined with other retirement savings options, annuities are a flexible option that can help plan participants create a diverse income strategy. Some may believe that investing in an annuity will encompass all of their savings, but it’s important to remember that people can choose when to annuitize, what portion of savings to annuitize and for how long.
By doing so, they can receive a source of lifetime income to cover basic expenses in retirement while dedicating other pockets of savings to other uses. Even when individuals contribute to annuities through an employer-sponsored plan, many are portable, which means they can go with an employee when he or she changes jobs.
• MYTH 2: Too expensive
While fees and expenses are always an important consideration, many plan participants don’t know how annuities are priced. The truth is many in-plan annuities may be cheaper than retail annuities.
Retail annuities can be 200 basis points; there can be charges, surrender fees. But retirement annuities are typically much less expensive. Ours, for example, are approximately 50 basis points — one quarter the price of most retail annuities.
• MYTH 3: Low demand
TIAA’s latest Lifetime Income survey found that 84 percent of Americans say having a guaranteed lifetime monthly income is important to them. Plan sponsors and advisors need to educate plan participants around annuities so they can take action.
Research has shown that individuals are more than twice as likely to annuitize in retirement if they save through an annuity in a defined-contribution plan during their working years.
• MYTH 4: Too much fiduciary responsibility
One of plan sponsors’ primary responsibilities is to help plan participants achieve a secure retirement, so offering annuities aligns with that mission. Plan sponsors should make sure to thoroughly research and evaluate annuities, looking at the financial strengths, risk-management capabilities and payment histories of the firms offering the products, and understanding what the costs and fees are.
The process for prudently choosing an annuity isn’t necessarily different from one for choosing a mutual fund. Some of the factors are different — the financial strength, ratings, history of payments — but the process is similar.
Plan sponsors and advisors can change how participants think about annuities. Make it a priority to highlight annuities in all future conversations about retirement income, and present it as a viable option to help plan participants bolster their savings. After all, annuities are the only sure way — besides Social Security or a pension — to guarantee a stream of income in retirement.