An important paper recently released strongly supports conclusions reached by previous studies as well as breaking new ground in the areas of trying to teach financial literacy and showcasing that retirees want annuities. Major findings:

Classes in general financial literacy are next to worthless in getting consumers to make better retirement planning decisions. This conclusion has also been reached in other studies, yet some politicians and regulators are pushing for mandatory general financial literacy courses, based on information pitched to them by organizations that sell financial literacy courses.

Consumers are clueless about how annuities really work. As shown in other studies, consumers are dismally ignorant about how annuities work. Only 20 percent knew an annuity could guarantee a lifetime income, nor were they aware of the various income options such as period certain.

A majority of consumers say they would fully or partially annuitize their retirement savings to produce a guaranteed lifetime income that can’t go down, but they say they don’t want an annuity. When asked initially if they wanted an annuity the vast majority said no. However, when annuity features were described without first saying the “a” word, coupled with the fact that they could still keep a large part of their money liquid in other investments if desired, annuities were generally well received.

Highly numerate people were much more likely to buy an annuity. Numeracy is to numbers what literacy is to reading. Highly numerate people understand risk when it is expressed as probabilities. After numerate people looked at the risk of retirement ruin (running out of money before death) under various investment portfolios they were more likely to choose annuities.  Education helped numerate individuals manage their retirement savings better.

Even after financial literacy training, half of the respondents were so insensitive to the risk of running out of money that they increased their portfolio risk even when it increased the risk of retirement ruin. What this means is one-half of retirees should not be managing their retirement savings and all the financial literacy classes in the world won’t help.

Governments and pension plans are doing a lousy job of informing retirees about annuities.

There have been several studies done that show financial literacy courses are a waste of time, because only those who are financially numerate benefit, and they would have done this financial research on their own. There have been several studies done that show that when told of the benefits and income choices of annuities, many retirees want an annuity. This study confirms these findings.

The new ground covered in this study is when a large group of consumers is taught about general financial concepts, various types of risk and annuities—and then given clear choices about different investment/annuity allocations and the likelihood of running out of money early with each—in spite of the training and being shown the consequences of choosing wrong, one-half of the consumers continued to make bad financial decisions.

In the grand scheme of things, studies such as this one are an indictment of the 30-year experiment with defined contribution plans and shows one-half of the people would have been far better off just getting a pension at age 65. This also shows that when you educate people about how fixed annuities work, more people will buy them. The task is to get regulators, politicians and the media promoting the annuity message.

Reference:

H. Bateman et al. 24 July 2014. Individual Capa­bility and Effort in Retirement Benefit Choices. Australian School of Business Research Paper No. 2014ACTL07. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2494036

Jack Marrion

Jack Marrion provides research and consulting services to insurance companies and financial firms in a variety of annuity areas. He also serves as director of research for the National Association for Fixed Annuities and as a research fellow for Webster University.

In 1994 he wrote a book to help banks market investment and insurance solutions to their small business clients. In 1996 he produced the first independent hypothetical return monthly publication comparing all index annuities on the market, and in 1997 created the first comprehensive report of index annuity sales, products and trends, “Advantage Index Product Sales & Market Report” (quarterly).

His insights on the annuity and retirement income world have appeared in hundreds of publications. In 2006 the National Association of Insurance Commissioners asked him to address their annual meeting and teach regulators the realities of index annuities. He was invited back in 2009 to talk to the NAIC about the effects of aging on senior decision-making. He is a frequent speaker at industry functions.

Prior to forming Advantage Com­pen­dium, Marrion was president and owner of an NASD broker/dealer with offices in nine states. Previous to that he was vice president of a life insurance company and vice president of an NYSE investment banking firm. He has a BBA from the University of Iowa, an MBA from the University of Missouri, and a doctorate from Webster University.

Marrion can be reached at Ad­van­­tage Compendium. Telephone: 314-255-6531. Email: ­[email protected].