Why Annuities Are Such a Tough Sell

Retirees are at more risk than ever of outliving their savings. People are living longer, and it's becoming harder to rely on either social security or traditional, defined-benefit pension plans as a safety net.

Annuities, insurance contracts that pay a guaranteed stream of income, can help. But they are a tough sell.

According to the Fidelity Research Institute, an affiliate of Fidelity Investments, there is "considerable academic research" showing that having a secure, guaranteed income stream has a positive impact on retirees' wellbeing -- both financially and psychologically. Yet most people would rather manage their retirement assets on their own as a lump sum than purchase an income annuity.

Fidelity wanted to find out why. Its recent survey of retirees and pre-retirees sheds light on the many reasons -- both emotional and logical -- that prevent people from investing in annuities

These are all valid concerns. Of respondents in the pre-retiree group, which represents the largest potential growth for the annuity business, 84% said they "want more flexibility on withdrawals." It's true that many annuities charge a hefty fee to withdraw money in the first seven to nine years, but there are also many that don't. You just have to shop around for them.

The next biggest barrier for retirees, "Need my savings to grow," is also a valid concern. The fees associated with annuities are one of their biggest drawbacks. The rates of return on fixed annuities are generally set at levels below those of either stocks or bonds. Variable annuities let you take on more risk in hope of generating bigger returns; the investments options (typically mutual funds) are generally designed to mirror similar products available outside of annuities. Still, their returns will always hampered by the expense and insurance fees associated with them.

Both fixed annuities and variable annuities with guaranteed minimum withdrawal benefits allow you to rely on a guaranteed income stream. The monthly payments you receive are defined by the amount of premium you paid in for a fixed rate annuity, or, in the case of variable annuities, to the performance of the underlying investments. While these products hamper your flexibility, you also get peace of mind from knowing that the payment will come in month after month.