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Annuities Hurt by Lack of Understanding


NEW YORK - If only they knew. Many investors who don't own annuities, most of whom own mutual funds, might be interested in buying one - that is, if only they understood how annuities worked, according to a recent survey unveiled here at the annual meeting for the National Association for Variable Annuities of Reston, Va.

Mathew Greenwald, president of Mathew 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 but do not currently own either a fixed or variable annuity. Respondents were between 40 and 65, 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: 61% reported owning mutual funds, 58% owned individual stocks, 36% owned bank certificates of deposit and 25% owned variable life insurance.

Most people expect to retire at age 62, regardless of how long they expect to live, the study discovered, demonstrating that while 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.

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.

More than half of respondents, 52%, have a primary source of financial advice, whether a financial planner, stockbroker, accountant or other. 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 what they will need. In the end, only 41% of those who tried to make a calculation said they didn't know the 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. Furthermore, 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.

Although fully 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 interest and earnings during retirement. Furthermore, over a third, 35%, of respondents expect to live off less than 60% of present-day earnings.

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."

Among investors familiar with annuities, mutual funds and stocks, 47% of respondents thought that mutual funds did best, 39% thought stocks did best and 7% thought annuities did best. In fact, respondents thought mutual funds were superior in the areas of flexibility, low fees and expenses and simplicity.

Even when it comes to financial risk, where annuities are able to provide guarantees through insurance, 58% thought that annuities best minimized financial risk, but 30% thought that mutual funds did so and only 5% picked stocks.

Investor perception of mutual funds demonstrates that "the mutual fund industry has told their story very effectively," Greenwald said.

While investors may understand some of the benefits of mutual funds, they could also benefit from education about other savings and retirement options. In particular, he pointed out that investors don't really understand the effects of ever-lengthening life spans, and "the problem is that longer life is a wonderful gift, but it's an expensive one."

As investors try to figure out how to fund their retirement, they will most likely look to a multi-product solution, not a single answer, Greenwald said.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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