Annuities are an essential component of the American retirement system, starting with Social Security. Why, then, do so few Americans understand them?
Most of us, it seems, are pretty much clueless about annuities. In one recent study, the American College of Financial Services gave older Americans a score of 12% out of a possible 100% for their knowledge of annuities, based on their performance on a short quiz.
Among a dozen knowledge areas measured in the school’s Retirement Income Literacy Study, the annuity ranked dead last. Respondents knew more about Medicare, life insurance and long-term care than annuities. The college surveyed 3,765 Americans ages 50 to 75 in August 2023.
In another recent survey, researchers from the TIAA Institute and Stanford University tested Americans on annuity literacy with a multiple-choice question that could not have been much simpler:
“Susan worries about living a long life and running out of money, the survey instructed. What is the best way for her to address that possibility?“
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The quiz offered these choices: She could buy an annuity. She could buy life insurance. There is nothing she can do. I don’t know.
Roughly half of the surveyed adults chose correctly. The January poll covered 3,876 adults.
“There is this question of why people don’t buy annuities. Part of it is that they don’t understand them,” said Gal Wettstein, a senior research economist at the Center…
