Recent changes to annuities raise the question of whether these investments are more costly than beneficial.

Annuities provide fixed payments for retired individuals, ensuring they have a stream of income throughout the course of their life. The Center for Retirement Research at Boston College concluded that over time, the overall expected present value of payouts from an annuity relative to its premium (cost) has remained stable amid changes.

Key changes that have impacted the value of retail annuities include the “increase in life expectancy and decline in interest rates.” These have raised the present value of a given stream of income. Lower interest rates lead a buyer to pay more for an annuity in the present than they would in the future. Similarly, the study concluded that “the rising gap in life expectancy by socioeconomic status (SES) has broadened, potentially reducing the annuity payout for the average person.” Longer life expectancy may dilute annuity payments, meaning a retiree gets less money per payment than they would 10 or 20 years ago.

According to the study’s findings, deferred annuities provide better longevity insurance (covering the chance of running out of funds during a life-span) than immediate annuities. Furthermore, deferred annuities provide higher premiums. Deferred annuities pay one premium when the individual is 65 and begin payouts at age 80. Another key benefit of deferred annuities is the ability to pair them with other benefits, such as survivor benefits, inflation protection or some refund in case of early death.

Moreover, growing gaps in mortality across socioeconomic status have yielded larger gaps pertaining to the value of immediate annuities across racial and educational groups. The study states that “higher-educated individuals can expect substantially greater returns per dollar of premium than less-educated individuals.”

Source: “The Value of Annuities,” by Gal Wettstein, Alicia H. Munnell, Wenliang Hou and Nilufer Gok; Center for Retirement Research at Boston College, March 2021. 

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