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Middle-Income Retirees Least Likely to Prefer Annuities: EBRI

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Retirees with the most and the least assets saved are more likely to buy annuities than those in the middle of the savings distribution, a report by EBRI found. The report also found that the less of their income they can annuitize, the better, as far as survey respondents were concerned.

Sudipto Banerjee, a research associate at EBRI, offered three possible explanations for the U-shaped trend in annuity preferences. First, people with fewer assets are more likely to run out of money in retirement and are more inclined to choose annuities, he wrote in a Feb. 8 issue brief.

(Related: DOL Posts Indexed Annuity Fiduciary Rule Exemption Draft)

Wealthier people tend to be healthier and live longer; those at the top end of the savings distribution are planning for longer lifespans and can afford annuities even after planning for a financial legacy to leave heirs, he wrote.

Finally, the people in the middle are facing more uncertainty in retirement and may be reluctant to part with savings for an annuity, according to Banerjee.

EBRI used data from the 2013 Internet Survey component of the biennial Health and Retirement Study for its report. The main survey collects information on income from various sources; the 2013 supplemental survey included questions about consumer preferences for immediate annuities.

Respondents were presented with four different scenarios: their current financial situation, based on their current monthly earned income, annuity income from Social Security and pensions, the value of their total savings, and the net value of their home; and their potential financial situation if they were to annuitize all, half or a quarter of their savings. Respondents were asked to choose which scenario they preferred.

Respondents were 65 or older, with at least $1,000 in savings. The total sample size was 950.

Just over 16% of respondents in the lowest income quintile said they preferred full annuitization of their retirement assets, compared to 12% of those in the third quintile and 21% of those in the top. EBRI found a steeper drop in interest in half annuitization, with 24% of those in the third quintile choosing this scenario, compared to 39% of the first and fifth quintiles.

Preference for the quarter-annuitization scenario skewed toward wealthier cohorts. Although preference dropped in the second and third quintiles, it bottomed out in the second.

Regardless of their level of assets, just 16.5% of respondents favored full annuitization, the report found. Over a third indicated they would prefer annuitizing half their savings, and 43% would choose to annuitize a quarter of their total retirement savings. The same trend is seen among respondents with no Social Security savings.

A 2013 report by EBRI found that less than 28% of retirement plan participants with the option to take a lump sum or an annuity chose the annuity. A 2007 study of Fortune 500 defined benefit plans found a similar annuitization rate.

EBRI also found respondents’ preference for annuities decreased with age. A 2013 EBRI report found preference increases among retirees up to age 70, and then drops. The current report found that in addition to preferring smaller levels of annuitization, older respondents were less likely to choose annuitization at all. Over 46% of respondents in the 65-to-74 age band chose partial annuitization, compared with 31.7% in the 85-plus group.

“The drop in preference for annuities as people age makes sense,” Banerjee wrote. “As people age and their mortality risk increases, annuities become less attractive as more people might think they won’t live long enough for an annuity purchase to be profitable; and as people age and their retirement savings shrink, liquidity concerns relating to health, long-term care, and other significant expenses may also prohibit more people from purchasing annuities.”

Finally, households that already receive more of their income from an annuity preferred annuities the least, the report found.

“This doesn’t mean there’s a causal relationship between the two, as other factors not being measured may be affecting preferences,” Banerjee wrote. However, “common sense suggests it wouldn’t be a surprise, as people might need liquid assets for emergencies or want to leave a bequest, so more highly annuitized households are likely to have lower preferences for more annuities.”

— Read LPL to Pay $3.7M Over Star Rep’s Unsuitable VA Sales to Seniors on ThinkAdvisor. 


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