A new analysis by the Employee Benefit Research Institute
(EBRI) finds that demand for immediate annuities is highest at the top and
bottom of the income spectrum, while remaining fairly anemic in the middle-income
EBRI researchers posit a few potential explanations for the
phenomenon. Presumably, those with inadequate assets might value a regular stream
of income very highly, the report suggests, while “those with the most” expect
to live longer and can more easily afford this type of a product while still meeting other pressing financial goals.
“A large majority—more than 70%—of households that are
currently receiving a Social Security benefit already get at least
three-quarters of their income in the form of annuities, from Social Security, employer-provided
pensions, and other annuity contracts,” observes Sudipto Banerjee, EBRI
research associate and author of the study. “The fact that most retirees are
already highly annuitized might help explain the lack of demand for additional
EBRI researchers find demand for information about annuities
is broadly increasing, and increased use of the products may be likely to
follow, especially given the decline of defined benefit (DB) pension plans.
The analysis shows important ways the level of savings an
individual holds strongly affect preferences for immediate annuities, which
begin paying out a regular stream of income as soon as they are purchased. As EBRI explains,
“Regression results show that effect of savings on annuity preferences follow a
U-shaped pattern, meaning that people at the bottom- and top-ends of the
savings distribution have a stronger preference for such annuities over people
in the middle of the savings distribution. But, savings has a large positive
effect on preference for annuities only for those in the highest-savings
The study notes that possible explanations for such behavior
could be that people at the bottom of the savings distribution are very likely
to run out of money in retirement and thus advice they might receive may steer
them toward annuities.
“At the same time, people at the top end of the savings
distribution expect longer lifespans and can afford annuities even after
leaving a financial legacy for their heirs,” Banerjee notes. “People in the
middle generally face more uncertainty about their retirement adequacy and so
they are more likely to hold on to their savings for precautionary purposes and
perhaps also for some hope of leaving a financial legacy for their heirs.”
The EBRI research goes on to suggest there may be increased
use of partial annuitization strategies, given that only 16.5% of retirees ages
65 and above preferred full annuitization of their assets, compared with 43%
percent who preferred a one-quarter annuitization.
The full report, “How Does Level of Savings Affect
Preference for Immediate Annuities?” is published in the latest EBRI Issue
Brief, available for download at www.ebri.org.