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What You Need to Know

  • As annuities become more common in 401(k)s, more retiring workers will face the choice of whether to buy one.
  • The real value in annuities for a client lies not in growing their money but in the stable income stream they provide.
  • On average, annuities are more beneficial to some demographics than others.

A recent study by the Center for Retirement Research at Boston College asked the question: What Is the Value of Annuities? 

The study wanted to look at the value of an annuity for those entering retirement as a large cohort of baby boomers who are not covered by traditional defined benefit pension plans are entering their retirement years. The study looked at two statistics for annuities: money’s worth and wealth equivalent.

As annuities and lifetime income options become more prevalent as an option in 401(k) plans, this type of information will become more important for those entering retirement. 

Money’s Worth 

Money’s worth is the ratio of the expected present value of the payments that the annuitant expects to receive over their lifetime compared to its premium cost. A ratio of 1 would mean that there is an expectation of receiving payouts equal to a PV of the total premiums. Often the ratio is less than 1 due to the costs embedded in the annuity. 

Wealth Equivalent 

The wealth equivalent is a calculation of the starting wealth that the annuitant would require to be as well off with annuitization of the annuity as without annuitization. This takes into account the insurance against outliving their assets that an annuity provides. 


The main finding of the study was that individuals receive a money’s worth of about $0.80 on the dollar for immediate and indexed annuities and about $0.50 on the dollar for deferred annuities. These amounts have remained stable since the last major study in this area in 2000. 

However, the insurance value or wealth equivalent of deferred annuities is higher, stemming from “their unique focus on protecting against the small probability of living a very long time,” according to the study.

The study also showed that Black Americans had a lower expected value due to their generally shorter lifespans, but they tended to benefit more from the insurance component due to their uncertain lifespans. In general, women fared slightly better than men in terms of the money’s worth calculation, as did those with the highest level of education. 

Is an Annuity Right for Your Clients? 

As with any financial planning decision or financial product, whether an annuity is a good fit for your client will depend upon their situation. If your client is covered by a traditional defined benefit pension from an employer as well as Social Security, they may not need to add an annuity as part of their retirement income planning. 

On the other hand, for clients without a pension, having another part of their retirement income stream guaranteed can provide a level of comfort and stability.

Your clients look to you to help them not only decide if an annuity is right as a portion of their retirement income stream, but also to help them decide on the type of annuity (immediate, deferred, variable, etc.) that is best as well as the best provider for that annuity. If you decide that an annuity is right for them, your expertise is invaluable in analyzing the costs of various annuity products as well as any special features that might distinguish one annuity from another. 

If you feel an annuity is not the right product for them or doesn’t add any additional value to the retirement planning that is already in place, they need your expertise to show them why you feel not adding an annuity is the best route for them.


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