Ask Morningstar’s retirement-methodology team about annuities, and they will offer lavish praise. When they model investment strategies for retirees, they invariably end up recommending big dollops of annuities for those who need lifetime income. The reason, as Morningstar’s Paul Kaplan states, is that “self-created longevity insurance is very expensive.” Retirees who want guaranteed income—and most do—are best served through a pooled holding.
That theoretical attractiveness hasn’t translated to the marketplace. Last year, reports the trade publication Ignites, annuities recorded $204 billion of new sales. In contrast, several trillion dollars flowed into mutual funds and exchangetraded funds. (Net sales were $700 billion, but gross sales—which is how annuity purchases are measured—were several times higher.) If the investment market were a meal, annuities would be a shrimp cocktail.