And yet, that economically rational move is still not widely adopted. Annuities — of all types — account for less than 10 percent of the $25 trillion in U.S. retirement assets.
Why? Loss aversion explains some of the reticence. It's not exactly easy to hand over a wad of money to an insurer with the prospect you may die long before getting paid back anywhere near your lump sum investment. For the record, that thinking misses the point that an annuity is insurance — against living a very long life — not solely an investment whose value is a function of ROI. To overcome objections, recent annuity design tweaks address the early-death conundrum by offering the ability to buy payments for a set period of time (or, period-certain in industry parlance) to the annuitant or a beneficiary.
Also weighing against annuity purchases is the perceived risk. Purchasing an annuity today is a calculated bet that the insurer will have the staying power to send you payouts two or three decades down the line. That is, will a financially strong insurer today be just as strong in 25 years? Again, for the record, instances of an insurer's going belly up are rare, and there are state insurance guaranty funds that serve as a backstop, up to certain account limits.
Even if someone is able to get past those issues, there's the maddeningly complex annuity marketplace, where choices include the plain vanilla (that's a compliment) single premium immediate annuity and single premium deferred annuity, as well as the variable and equity-indexed versions of annuities that include an investment component. All those options require careful cost and benefit comparisons, and each of those types of annuities can be stuffed with add-on bells and whistles that test the analytic skills of a CFA, let alone a consumer.
Given that annuities remain a hard sell despite their potential value as a much desired and needed insurance against outliving your savings, some well-placed nudges seem in order. In "Consumer Preferences for Annuity Attributes: Beyond Net Present Value" UCLA Anderson's Suzanne B. Shu and Robert Zeithammer, along with Duke University's John Payne, found that expanding the information presented to consumers about an annuity could increase demand without having to increase the payout as an incentive.
The authors, in a survey conducted via a nationwide internet panel of 657 adults ages 40-65, also found that reactions to particular features of annuities didn't match the actual dollar value offered. People tended, for instance, to place a higher value on period-certain annuity features than the contracts actually provided. In turn, they placed a lower value on inflation-protection features than a purely economic judgment would.