It's no secret what the best financial advice for retirement is - but most people ignore it anyway

By Beth Pinsker

Research can prove a lot of facts, but that doesn't mean it changes how people act

Research can show the benefits of certain retirement strategies, but sometimes people don't want to hear it.

Buying an annuity can be a good idea for many retirees. It helps with the feeling of security, allowing people the mental freedom to spend the money they have saved throughout their working years, and can save them from one of their biggest fears: running out of money.

An avalanche of financial research over the past several years has shown the value of guaranteed income in retirement plans. Prudential recently found that two-thirds of Americans would choose a guaranteed monthly check for life over a lump sum. But the number of people who actually do something about it by buying an annuity? That's far smaller.

The adult population over age 50 in the U.S. is about 125 million, while the number of people who have annuity contracts is less than 30 million - under 20% - according to Limra, the insurance trade organization. When you see rosy pictures about the growth of the annuity market in trade publications, this is likely because they are measuring the level of assets involved, according to Limra, which is mostly about wealthier clients buying annuities in greater amounts.

David Blanchett, head of Prudential Financial's retirement research, has piles of studies that he and others have done that show annuities help retirees get over the paralysis that prevents a significant portion of people from spending the money they have so diligently saved over the years. But he and his colleagues have still not solved for the last mile of the annuity conversation: actually getting people to buy them.

The case for long-term-care funding follows a similar path. Financial advisers can quote reams of research about why people should buy long-term-care insurance if they cannot adequately set aside enough funds for this purpose - and given that the cost can be infinite, who can? - but few of their clients are going to end up buying a policy. The generally accepted rule is that some 70% of Americans will end up needing some kind of care as they age, but less than 10% - as low as 3% by some measures - have any type of long-term-care insurance policy that would help them.

"There's been research on this going back a few decades. It's about the products, awareness, lack of desire to transfer money to an insurer - there are a ton of misconceptions," said Blanchett.

In a conversation with MarketWatch, Blanchett delved into the reasons behind the gap between advice and action - why, even as the retirement industry seems to be talking until it's blue in the face about annuities and other insurance products, the public has not shifted its behavior yet.

Sticker shock

Americans love Social Security and pensions, so why not annuities? Mostly because they have to shop for it, and there are a lot of options they don't understand.

Salespeople or brokers quote consumers a price, which seems astronomical as a lump sum, and present a rate of return. For instance, for a person with my profile (female, 55, living in New York), a typical single-premium immediate income annuity might be priced at $100,000 from my tax-deferred IRA, which would get me $590 a month, according to Blueprint Income. That's a draw of about 7% per year, and eventually I'd be able to calculate the total rate of return on the investment (probably around 3% to 4%), but I wouldn't know it until I died because that number depends on how many months of payout I get over time.

After all that, the part about annuities that people say they want - the guaranteed check for life - gets lost. People look at those numbers and feel these things instead: It's too much money to part with; a 7% rate of return is less than the stock market might yield in a given year; the overall payout return might be less if I die sooner than I expect.

Leading retirement researcher Wade Pfau recently weighed in on these fears on his podcast, "Retire With Style," saying that many people are dissatisfied with annuities because they are comparing them to stocks. "Don't have annuities compete against the stock market, because that's not the point. Think of the annuity as more of a bond alternative," he said.

The same turnoff happens with long-term-care insurance, whether it's a traditional monthly premium policy or a hybrid life-insurance policy that requires a lump-sum payment upfront.

"Most people think it's astronomical," said Blanchett. "This is the perfect example of where insurance is the ultimate remedy, but the people who want it can't get it."

Inflation fears

Another part of the math that impedes people from buying long-range insurance products is fear of inflation. While Social Security has a system built in for cost-of-living adjustments, and many pensions do too, most annuities and long-term-care policies are sold without it.

Simply, Blanchett noted, "it's really expensive to hedge inflation."

Looking at this in the annuity sector, if you add an inflation rider of 2% to the product described above for a 55-year-old woman in New York, then $100,000 would no longer buy you $590 a month, but rather something more like $450 a month instead, according to Blueprint Income. On paper it might make sense, because in 30 years I'd much rather have $815 a month than $590, but I'm paying a lot for that difference over time. When it comes down to it, providing inflation protection raises the costs of the policies so much that people don't want them.

The industry's solution for this at the moment is to work around it - ladder annuities, cover the difference with TIPS or other inflation-protected fixed-income products, or increase savings. "Imperfect solutions for complicated problems," said Blanchett. But the ultimate outcome is that instead of supplementing annuities, people don't buy them at all.

Underused advice

Could better education and more advice change the situation? As more workplace retirement plans try to make annuities part of the glide path of managed investments like target-date funds, a lot of education will be needed for workers as they approach retirement.

This is another place where a behavior gap has become apparent: There are a great many more workplaces that offer advice to their employees, but very little uptake of that advice. One recent Voya retirement confidence survey found that 36% reported being offered retirement investment advice, while 29% reported using it.

Essentially, people are unwilling to take the advice to get advice.

"Access alone isn't enough. Engagement is the challenge for all employers," said Kerry Sette, head of customer insights and research at Voya.

Voya has also delved into research on annuities and found that "anytime you talk about guaranteed income as a concept - especially if you use the word guaranteed - people love it. But annuities have a PR problem," said Sette.

When you pair that with the advice question, Sette said that most Americans are open to advice. Many say they are planning to hire a financial professional. But when it comes to actually acting, there's a disconnect.

"How do we get their attention? Make it a priority?" Sette said. "We find that in our study, just having a plan and knowing some small steps helps get people started, like at least getting the match. Let's get them on the right path."

Whether that path eventually ends with an annuity will depend on whether the retirement industry and consumers find a bridge to get the protection people want into a product they can stomach.

Got a question about retirement? Fill out our questionnaire or write to me directly at beth.pinsker@marketwatch.com (please put "Fix My Portfolio" in the subject line).

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-Beth Pinsker

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10-20-26 1657ET