On the Fence About Annuities?
May 10, 2012 by Kelly Greene
May 7, 2012, 7:30 AM
By Kelly Greene
Do Americans like the idea of buying annuities to guarantee their retirement income? It depends on how you frame it, according to research released last week by BlackRock, for which Boston Research Group polled 1,035 retirees.
Asked if they would have chosen a steady income stream throughout retirement or a lump sum, 77% of the retirees said they would have taken the regular payments. Another 15% said they would prefer a partial lump sum and partial income stream.
But when asked whether they would prefer to have control of their money or give up that control in exchange for steady, guaranteed retirement income, about 70% said they wanted to stay in control of their assets.
“It’s the same question, and yet now you’ll see a night-and-day difference in response,” says David Laibson, an economics professor at Harvard University. “If you frame annuities as income for life, Americans love annuities. If you frame it with the necessary loss of control, people head for the hills.”
His recommendation: “We need a national conversation around this issue.”
That seems to be on the horizon. In February, the Treasury Department rolled out a proposal to make it possible to buy “longevity” annuities with a portion of savings in employee-sponsored retirement plans, including 401(k)s.
The idea is to provide a cost-effective way for people early in retirement, typically 65 to 70, to help address the risk of outliving their assets by buying a predictable income stream with a portion of their retirement savings that would start at age 80 or 85. Once a retiree knows how long the remaining nest egg has to last, managing the savings becomes less stressful.
The current barrier: Workers have to start taking required minimum distributions from retirement accounts at age 70 1/2, including the value of an annuity within the plan. Under the Treasury proposal, an annuity that costs no more than 25% of the account balance, up to $100,000, and that begins by age 85, would be exempt when calculating required withdrawals.
