Study Finds 'Guaranteed Income for Life' More Popular Than Annuities

Retirement experts have often said that the name “annuities” should be changed due to the historically bad reputation of these products. With a resurgence of this retirement product, one researcher looked at why it matters what a product is called.

In his research paper “People Prefer a Guaranteed Income Stream for Life Over an Annuity,” Stan Treger, senior behavioral scientist at Morningstar, found two key points: (1) People are more willing to use their 401(k) to purchase a guaranteed income stream for life rather than an annuity, and (2) the thought of running out of money in retirement increases preferences for deferred over immediate annuities.

Study Findings

Treger’s research was most interested in “whether the label of the product alone can ‘make or break’ its appeal to prospective retirees.” He used the terms “annuity” vs. “guaranteed income for life” to determine the response by participants.

He also looked at the “psychological foundations behind annuity choice,” or how those who were interested in annuities chose from products with different features.

The research included 1,067 U.S. residents over 30 who were employed or about to begin work.

The study asked several questions about a retirement product. For about half of participants, the product was described as “a guaranteed stream of income for life.” For the other half, it was described as an “annuity.”

The survey asked if a person would exchange a portion of their 401(k) balance for a product that starts at retirement and ends at death, would they allow their employer to exchange a portion of their retirement of their retirement savings for a product, how much would they be willing to put toward a product, whether they would pay a lump sum to gain immediate income (immediate annuity) or pay a smaller amount for income later in life (deferred annuity), and whether participants would delay Social Security income to receive more money later in retirement.

‘Guaranteed Income’ vs. ‘Annuity’

Treger found that “our experimental results suggest that framing effects on annuities are not bound to the inner workings of their descriptions. Rather, they extend to the surface with the product’s label itself.”

Indeed, they found that using the term “guaranteed stream of income for life” rather than “annuity” increased participants’ willingness to use a chunk of savings for an annuity.

“These results hint that a simple product title change can make a difference in its appeal,” Traeger states. “People who see annuities for their intended purpose, a guaranteed stream of income that insures against depleting retirement funds, find them more appealing and are thus open to purchasing the product.”

Other Findings

The research also found:

• There was concern about running out of money during retirement.
• There was openness to an employer exchanging a portion of their retirement savings for the insurance product. Participants, however, wanted the decision to do so to be theirs.
• The more concerned they were about running out of money, the higher the amount they were willing to put into this insurance product.
• On average, participants were willing to exchange 30% of their retirement savings for guaranteed income for life.
• The more comfortable participants were in exchanging a larger amount of savings for an insurance product, the more they were willing to delay Social Security benefits.
• More preferred a larger sum and immediate payment to a smaller amount for deferred.
• Those who were more worried about running out of money in retirement, however, preferred deferred products over immediate ones.