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Funds Beat Annuities at Pinning Target Market


NEW YORK - If only they knew. Many investors who don't own annuities might be interested in buying one - that is, if only they understood how annuities worked. Comparatively, mutual funds do a far better job of reaching investors, even though there is a great deal of work funds can do in improving their image as being a risky investment.

These findings are according to a recent survey unveiled here at the annual meeting for the National Association for Variable Annuities (NAVA) of Reston, Va.

Matthew Greenwald, president of Matthew Greenwald & Associates in Washington, conducted the "2002 NAVA Survey of Non-Annuity Owners," which sought to gain a better understanding of why some investors haven't bought annuities.

"NAVA was concerned that there's insufficient awareness of annuities, and people might not be properly preparing for retirement," Greenwald said, adding that his own work in the past has specifically raised concerns that many investors do not understand the financial needs created by longer life spans.

In August, Greenwald conducted a phone survey of 500 individuals who fall within the target market for annuities, those aged 40 to 65, but who don't own either a fixed or variable annuity.

Respondents were financial decision makers and had a household income of at least $50,000.

Although these investors did not own annuities, they did own other investment products, with securities-based investments being most common. Sixty-one percent reported owning mutual funds, 58% individual stocks, 36% bank certificates of deposit and 25% variable life insurance.

While the study demonstrated that respondents had "a reasonably good sense of how long they're going to live, they don't plan on working any longer than people who expect a shorter life expectancy. They haven't fully incorporated that longer life expectancy means more retirement planning," Greenwald concluded.

Keeping Up With the Old

Greenwald suggested that two factors may influence this phenomenon. First, significant increases in life expectancy are relatively recent, so people may not fully understand the full impact of living longer. "Second, it comes from a desire to keep pace with the older generation," he said, adding that retirement systems have also not necessarily adjusted to accommodate expectations of a longer life span.

The bulk of respondents, 86%, had some degree of confidence that they would be able to maintain the lifestyle they wanted throughout those retirement years, but only 33% were "very confident," indicating that at least some doubt lingered in many investors' minds.

From an estate tax standpoint, annuities are less advantageous to heirs than other investments, such as mutual funds, which offer a step-up in tax basis, and life insurance, which passes tax-free. While this is seen as a major drawback to annuities, the survey revealed that only 15% of respondents feel it is "very important" to be able to leave an estate. Meanwhile, 40% of respondents remained in the middle ground, viewing an estate as "somewhat important," while the remaining 44% gave it little weight.

Greenwald suggested that it's likely that high-net-worth investors find leaving an estate most important. While most investors would like to leave an estate to their heirs, they are primarily concerned with their own retirement and "don't have a specific figure in mind. If you ask them how much, it's basically whatever's left over," Greenwald said.

Most Seek Advice

More than half of respondents, 52%, have a primary source of financial advice, whether it be a financial planner, a stockbroker, an accountant, or other professional. Among those, 45% use a financial planner, and only 16% use a stockbroker, the second most common category.

However, not all planners are even helping investors estimate how much they will need to retire comfortably. Of the 57% who have attempted the calculation, only 27% had a financial planner do it for them. The survey found that 40% completed some kind of worksheet and almost a quarter, 23%, estimated an amount.

"I think they came up with something and had no confidence in the result, or came up with a big number that was unattainable," Greenwald said, theorizing why so few investors could actually name a sum. Further, he speculated that this statistic belies how poorly many Americans have actually planned for retirement because they are afraid to confront the need to save more money.

"For the most part, people can cut back on lifestyle, but giving that up to set aside more money for retirement is something they just don't want to do. They haven't thought through the consequences," Greenwald concluded.

Although a full two-thirds of respondents plan to work for pay after retirement, only 2% intend to rely on working wages as a strategy to manage retirement assets. Instead, a third of respondents anticipated living completely off of interest and earnings during retirement. Furthermore, over a third, 35%, of respondents expect to live off of less than 60% of present-day earnings.

Three Out of Four

Never Considered Annuities

This strategy, Greenwald said, is inherently flawed because it does not take into account the effect of inflation over many years. Although a precise figure is impossible to ascertain for all individuals, "it isn't 60% for the people who are going to live 20 years."

Although annuities provide one solution for investors dealing with retirement issues, 75% of respondents have never considered purchasing one. Of those, 28% have simply never thought of it and 27% said they don't understand annuities or lack adequate information.

Among investors familiar with annuities, mutual funds and stocks, 58% thought that annuities best minimized financial risk, with 30% thinking that mutual funds did so and only 5% selecting stocks as the best way to hedge one's financial risk. As for long-term investment performance, 47% of respondents thought that mutual funds did best, 39% thought stocks did best and 7% thought annuities did best.

Investor perception of mutual funds demonstrates that "the mutual fund industry has told its story very effectively," Greenwald said. With proper education, the annuity industry could do the same.

In particular, Greenwald pointed out that investors don't understand the effects of ever-lengthening life spans, concluding, "the problem is that longer life is a wonderful gift, but it's an expensive one."