A recent pitch I received to learn more about the annuity market included the line, “annuities are coming, whether you like them or not.”
The basic idea behind an annuity is in exchange for investing in the product with an insurance company, you get a steady stream of income for life. An annuity offers protection against the risk of running out of money. For future retirees it’s the key consideration.
A number of reasons lie behind growing interest in annuities. Americans are living longer, yet company pensions and its guaranteed income for life has largely disappeared. The risk of outliving savings is real with 401(k)s. For another, the Senate’s Secure Act — a retirement savings enhancement bill — is likely to become law. The Senate bill reflects a similar House bill. Among the popular provisions in the bill is making it easier for 401(k) plans to offer participants the option to annuitize their savings, turning their 401(k) into something that behaves more like a pension.
Economists love annuities. The product eliminates the risk of running out of money with age. Yet people purchase relatively few annuities on their own, a reluctance economist call the “annuity puzzle.” The “puzzle” doesn’t seem like much of a mystery. The annuity market is maddeningly complex. Many annuity products are opaque, high-fee investments.
There are other techniques people can use to reduce the risk of outliving their assets, too. These strategies include working longer, delay filing for Social Security benefits until age 70 and cutting down on fixed household costs (such as paying off debts). Social Security is an inflation-adjusted annuity and it may be enough for many people.
There is a crying need for greater innovation in developing lifetime income solutions during the retirement years. The devil is in the actual details, however. What will be the fees and costs of the annuity options attached to 401(k) plans? Will the addition of annuity choices add to the complexity of the retirement savings system?
The last point is critical. The retirement-savings system is far too Byzantine. Earlier in the year I moderated a series of panels on the topic, “What Does it Take to Build a Better Retirement System?” Among the themes emphasized by the experts was that the menu of choices with 401(k)s is too complicated. Simplicity matters when it comes to retirement savings.
So yes, retirement savers should learn more about annuities. But their wariness about the product so far is smart.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.