Role of Immediate Annuities for Retirees Varies

An EBRI analysis examines reasons why demand for immediate annuities among retirees and near-retirees remains low. 

A new analysis by the Employee Benefit Research Institute (EBRI) finds that demand for immediate annuities is highest at the top and bottom of the income spectrum, while remaining fairly anemic in the middle-income groups.

EBRI researchers posit a few potential explanations for the phenomenon. Presumably, those with inadequate assets might value a regular stream of income very highly, the report suggests, while “those with the most” expect to live longer and can more easily afford this type of a product while still meeting other pressing financial goals.

“A large majority—more than 70%—of households that are currently receiving a Social Security benefit already get at least three-quarters of their income in the form of annuities, from Social Security, employer-provided pensions, and other annuity contracts,” observes Sudipto Banerjee, EBRI research associate and author of the study. “The fact that most retirees are already highly annuitized might help explain the lack of demand for additional annuity income.”

EBRI researchers find demand for information about annuities is broadly increasing, and increased use of the products may be likely to follow, especially given the decline of defined benefit (DB) pension plans.

The analysis shows important ways the level of savings an individual holds strongly affect preferences for immediate annuities, which begin paying out a regular stream of income as soon as they are purchased. As EBRI explains, “Regression results show that effect of savings on annuity preferences follow a U-shaped pattern, meaning that people at the bottom- and top-ends of the savings distribution have a stronger preference for such annuities over people in the middle of the savings distribution. But, savings has a large positive effect on preference for annuities only for those in the highest-savings quintile.”

The study notes that possible explanations for such behavior could be that people at the bottom of the savings distribution are very likely to run out of money in retirement and thus advice they might receive may steer them toward annuities.

“At the same time, people at the top end of the savings distribution expect longer lifespans and can afford annuities even after leaving a financial legacy for their heirs,” Banerjee notes. “People in the middle generally face more uncertainty about their retirement adequacy and so they are more likely to hold on to their savings for precautionary purposes and perhaps also for some hope of leaving a financial legacy for their heirs.”

The EBRI research goes on to suggest there may be increased use of partial annuitization strategies, given that only 16.5% of retirees ages 65 and above preferred full annuitization of their assets, compared with 43% percent who preferred a one-quarter annuitization.

The full report, “How Does Level of Savings Affect Preference for Immediate Annuities?” is published in the latest EBRI Issue Brief, available for download at