Annuitization Rates Are Inching Up, But What Will Take Them Higher?
Although lifetime income is unique to annuities among financial products, this feature has not been widely utilized.
In 2000, just $4.2 billion of the $190.2 billion in annuity sales went towards the purchase of an immediate annuity and just 1% of deferred annuity assets were annuitized (see Figure 1).
However, interest in using annuities for income has increased considerably among industry players, as it becomes apparent that the demand for guaranteed income will increase in the years to come. This article explores the factors fueling that demand and then looks at some possible industry responses.
First, lets review todays annuitization landscape.
The rate of annuitization is higher for fixed deferred annuity assets (2.1%) than for variable annuity assets (0.6%). Demographics are probably the primary factor in this, as more fixed annuity owners are of an age where they might consider annuitizing. Fixed annuitization is also easier for
consumers to understand than variable annuitization.
This didnt discourage several annuity writers from developing new immediate variable annuities (IVAs) in the last few years. And although new product filings in this area have slowed significantly, likely as a result of the recent economic downturn, IVA sales did grow last year even as deferred VAs lost ground.
Going forward, many factors will impact the demand for guaranteed income:
Increasing numbers of retirees. While no reliable source on the number of retirees currently exists, the 65+ population serves as a proxy. This group numbers about 35 million today, representing nearly 13% of the population (see Figure 2). This decade, the group will increase by another 5 million.
The driving force: The real growth will occur in the following two to three decades, growing to 76 million strong by 2037, or over 20% of the population (see Figure 2).
Increasing life expectancies. We are all aware of the tremendous gains in life expectancy during the last century. The rate of increase is not predicted to maintain the pace set in the 20th century, but life expectancies will undoubtedly continue to grow.
There are two pitfalls in life expectancies that must be overcome. First, people retiring today tend to underestimate their own longevity, frequently basing it on that of their parents or grandparents. Second, advice on how to die broke is rampant and seldom mentions annuities.
The driving force: Public education about the dangers of planning for a specific time period, such as their life expectancy, will increase. This is especially necessary since life expectancy is a moving target (i.e., for a 65-year-old woman with a 20-year life expectancy, her life expectancy if she survives to age 85 is greater than zero).
Other sources of guaranteed income. Each year, more people retire with accumulated assets in defined contribution savings plans, and fewer with defined benefit plan income. In addition, defined benefit plans are increasingly offering lump sum benefits as an alternative to lifetime income; and many employers have converted their traditional defined benefit plans to cash balance plans (which, though technically defined benefit plans, look more like defined contribution plans).
The driving force: A growing number of people will retire without any source of guaranteed lifetime income other than Social Security. With confidence in the future of Social Security waning, many are assuming it wont be there for them.
How and when people retire. Other trends will greatly impact the timing and nature of retiree income needs. The median retirement age fell steadily from the 1950s to the early 1990s, before it leveled. Early evidence suggests this trend has now reversed itself.
