While most investors these days are focusing on risk in terms of the market and its effect on their account balances, Tim Burns in his blog, Fiduciary Investor, says that they should pay attention to a larger risk. It’s longevity risk, or the risk of a retiree outliving his or her assets. Mr. Burns, in his post, Longevity Securitization, says that
The adoption rate of retirement annuities will however, be influenced by; investor perception, pricing, insurance industry risk retention models and the state of the structured investment markets.
Of all the factors that Mr. Burns mentions, investor perception will be the most difficult one with which to deal for two reasons.
First, most investors don’t even think there is a longevity risk. According to a recent Fidelity Research Institute study, Structuring Income for Retirement: Addressing America’s Emerging Retirement Income "Gap", retirees and pre-retirees are signicantly underestimating how long they need to make their retirement savings last.
Second, there is the annuity puzzle, the term given by the financial service industry to investor aversion to annuities. Some in the industry believe people say "no" to annuities because of:
- A desire to leave a legacy
- The complexity of annuities
- A lack of financial literacy
- An aversion to perceived loss
- A desire to maintain control
The need for annuities is certainly there, but it remains to be seen how well the financial service industry will deal with both the logic and the emotion of the matter.