Understanding the behavioral benefits of annuities

Demand for annuities has been soaring as the result of a combination of factors ranging from market dynamics to demographic trends and product innovation. In fact, Limra projects sales will increase 10% from a year ago, which would surpass the $350 billion mark. Further bolstering the growth of the annuities market, geopolitical instability and economic conditions make annuities an attractive option for individuals looking to create more certainty in their retirement.

These factors, along with a proliferation of financial product options and features, have made the retirement planning landscape more complex for those in or nearing this next phase of life. In addition, retirees face risk factors that weren't present in their accumulation years, such as sequence of returns risks, inflation and longevity concerns.

Further complicating the retirement landscape, behavioral economics shows that emotions often influence our actions – and inaction – with respect to our finances, even when that’s at odds with our own best interest. As a result, many retirees exhibit sub-optimal behavior and don't practice the prescribed approaches to systematically drawing down assets in retirement. Instead, they constrain spending and many even continue to save.

As financial professionals, we tend to position annuities for the strong quantitative benefits they provide, yet we’re finding it’s the emotional and behavioral benefits of annuities that often make these solutions the ideal choice for some consumers. This is particularly important now as we see confidence waning when it comes to financial security in retirement.

Confidence in one’s ability to live comfortably in retirement is declining, according to a recent study New York Life conducted in partnership with Morning Consult. In 2023, 64% of workers felt very or somewhat confident, down from 73% the prior year. Further, consumers are apprehensive about several factors impacting their retirement, including prolonged high inflation, increasing costs of living, increasing volatile markets, and more, according to the Greenwald Research Retirement Confidence Survey 2023.

When it comes to spending in retirement, contrary to economic theory, only a small minority of retirees are following “the 4% rule.” Half of retirees withdraw from savings and investments, while nearly a third don't take money at all, according to the New York Life research referenced above. To manage higher costs of goods and services, retirees are reducing discretionary spending or adjusting their spending, rather than withdrawing money from their savings. This is an overly conservative approach that can impact their ability to enjoy the retirement they’ve worked so hard to achieve.

To help guide conversations with your clients about how annuities may bring qualitative and emotional benefits on top of quantitative ones, here are some key findings:

• Annuity owners are happier and more confident than peers who don't own an annuity. First, they're more confident that they will be able to retire at their anticipated retirement age (96% for annuity owners vs. 68% of non-annuity owners). Second, they're more confident that retirement savings will last the rest of their lives (78% of owners say they're very/somewhat confident vs. 61% of non-annuity owners). And last, they're more satisfied with retirement (75% of owners say very/somewhat satisfied vs. 71% of non-annuity owners).

• Annuity owners make better financial choices in a few ways: They have higher levels of spending, greater equity allocations, and they do more buy-and-hold investing. Further, more than two-thirds say it allows them to spend more on discretionary items than they would otherwise, and more than two-thirds say it allows them to take greater investment risks with other assets than they otherwise would. In addition, 85% say owning an annuity helps them budget more effectively.

Financial professionals can play a key role in helping clients overcome suboptimal behaviors by recommending strategies that offer an opportunity to generate consistent retirement income, guaranteed income solutions backed by highly reputable insurance companies, and other insurance products as part of a comprehensive retirement plan. You can help deepen clients' understanding about the ways annuities can play a significant role in one’s retirement satisfaction as a result of the emotional and behavioral benefits they can provide.

Philip E. Caminiti is managing director of retail annuities at New York Life.