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Market crashes, such as we experienced in March at the onset of the pandemic, drive assets to the safe haven of government bonds. But our research shows this flight to safety mindset did not translate to an increase in demand for annuities.

The recent drop in annuity demand during the COVID-19 market turbulence is a mystery. Older Americans gravitated away from investment risk. Using a survey of older respondents conducted after the March market crash, we find evidence that there is a dissonance between those who understand what annuities do and those who value guaranteed lifetime income.

The annuity puzzle cannot be solved without educating those who value annuities the most.

The American College conducted an online retirement literacy survey through Greenwald & Associates in late April and early May on behalf of The New York Life Center for Retirement Income. The goal was to ascertain knowledge and attitudes about retirement income planning and financial products among 1,931 individuals approaching or in retirement (age 50-75) with at least $100,000 of non-housing wealth. The survey included a number of questions about annuities that assessed knowledge, gauged interest in guaranteed income, and evaluated whether the recent market turbulence increased demand for income security.

Annuity demand fell during the pandemic. This is surprising because older investors prefer less investment risk after market drops – a phenomenon we’ve documented in prior research. Since the demand for equities declines in times of higher market volatility, we expect that demand for “safe” assets to increase. Income annuities are perhaps the safest retirement assets, because they generally invest in bonds and protect against longevity risk.

So why didn’t demand for annuities go up after the March market crash?

In order to make good decisions about buying annuities, an individual needs to have a basic understanding of the product. Annuity knowledge was among the lowest of all surveyed retirement literacy areas. For example:

  1. 19% correctly guessed that the payout on a single-premium immediate annuity (SPIA) to a 65-year old male was about 6% and not 10% to 15%;
  1. Only 23% knew that SPIAs were more expensive for younger buyers; and
  1. Only 12.6% correctly answered that a VA with a GLWB rider continued to make income payments when the investment account falls to zero.

Only 1.5% got all three annuity questions right and 9.8% answered two questions right. The majority (58.1%) didn’t get any of them right. This is worth keeping in mind when judging a client’s ability to grasp the value of an annuity or even the effectiveness of product disclosures to an average buyer who has no idea what an annuity is all about.