Anatomy of an Annuity Buyer
December 31, 2009 by Howard J. Stock
September 18, 2009
Eight out of 10 annuity holders have annual household incomes of less than $100,000, the poll found, and almost half of respondents (42%) brought in less than $50,000 a year. Only 4% of people with household incomes in excess of $200,000 own annuities.
Seven out of 10 annuity holders are retired and 93% of respondents say they still own the first annuity they bought. The average age of annuity owners is 70 years, up from 66 in 2005. Women make up a slight majority of annuity owners, at 58%.
Despite annuities’ high cost and the legions of people in general who say they aren’t prepared for retirement, annuity owners are a confident lot. At 91%, almost all respondents agreed with the statement “you have done a very good job saving for retirement.” The same number says the prospect of tax-free income is a strong incentive for waiting until they retire before withdrawing assets and that the tax advantages have been an incentive for them to save for the long term.
Three fourths of annuity owners will use the money to fund their retirements and 83% say the built-in longevity insurance in annuities is a vital feature. Eighty nine percent of annuity holders believe their money is safe in these products.
“Advisors who aren’t considering the benefits of annuities for their middle-class clients are missing an opportunity to service them,” says Bryan Keene, a partner at Davis and Harman, a law firm in Washington D.C. that provides counsel to the Committee of Annuity Insurers, a Washington lobbying group that commissioned the poll. “The takeaway is that middle-class individuals need retirement security, and annuities provide that security. I only see demand increasing as the portion of the workplace covered by defined-benefit plans continues to shrink.”
Why are annuities the bailiwick of the mass affluent? Kerry Pechter, publisher of Retirement Income Journal and author of Annuities for Dummies says that people with household incomes of $100,000 and below don’t have much choice. “If you have enough money, say, $1 million, you can self-insure without giving up liquidity,” he says. “But two things are going on at the lower income levels. First, lower-income households tend to be more risk averse and conservative. Second, if you’re looking to amp up cash in retirement by pooling with other annuity owners on the understanding you’ll forfeit what’s left when you die, annuities will provide you will more cash than any other method.”
The cutoff point is around $100,000 in assets he says. Below this point, and the 4% sustainable withdrawal rate isn’t enough to live off. “If you need to withdraw 5%, 6%, or 7% to cover your expenses, you really need that annuity,” Pechter says.