Solving the Annuity Puzzle: Why Immediate Income Annuities Are Still on the Sidelines Despite 8% Yields
If Guaranteed 8% Income Is on the Table, Why Are Clients Saying No?
It’s a question every advisor has asked: why aren’t more clients locking in guaranteed lifetime income when immediate income annuities offer yields approaching 8% for a 65-year-old man? In a world where 4% withdrawal strategies still get airtime, this should be a no-brainer.
And yet? Immediate annuities account for just $18.6 billion of a $430 billion annuity market—a measly 4%.
We’re not facing a market gap. We’re facing a behavioral and structural disconnect.
The Annuity Puzzle, Explained
MarketWatch recently revisited the well-documented "annuity puzzle": the strange reluctance of retirees to embrace life annuities, even when they offer higher income and more security than do-it-yourself drawdown strategies.
The math is clear. But the psychology? That’s where things get messy.
Clients Want Flexibility, Not Just Guarantees
Let’s be honest. Income annuities ask for a lot: a lump sum, irrevocably converted into a stream of payments. No access to the principal. No refund if you pass early (unless a period certain is added). It’s the financial equivalent of marriage with no prenup.
Add to that clients’ overvaluation of liquid assets, a fear of losing control, and general misunderstanding of longevity risk, and you get today’s underwhelming adoption.
But Here’s What Needs to Change: Us.
We need to rethink how we present these tools. Advisors must shift from selling products to solving outcomes.
Want income that lasts no matter how long you live? That’s not a feature. That’s a necessity.
We need to do more to illustrate the concept of mortality credits. We need to show how a 5%–8% guaranteed payout compares favorably to a portfolio drawdown strategy that depletes at 4% and fails 30% of the time.
Defaulting to Income: A Policy Solution Worth Considering
A team of researchers at the National Bureau of Economic Research (NBER) recently proposed a bold fix: automatically convert 20% of 401(k) balances above $250,000 into annuities at retirement, with opt-out provisions.
It’s the same logic that made auto-enrollment and target-date funds the norm in DC plans: behavioral inertia works. Set the default wisely, and most people stick with it.
Advisors should take this seriously. Not as a threat to their business, but as a cue to integrate annuities into plan design proactively, before regulators force the issue.
Use Immediate Annuities Strategically, Not Dogmatically
Not every retiree should annuitize. But every retiree should understand the tradeoffs.
High-net-worth clients may only need partial annuitization to secure baseline expenses.
Health-compromised clients may prefer deferred annuities or hybrid LTC options.
Those with strong bequest motives can choose refund riders or alternatives.
This isn’t about product pushing. It’s about crafting income plans that survive both volatility and longevity.
The Inflation Blind Spot
Most immediate annuities don’t offer COLAs. That makes them less appealing in a world still recovering from a 40-year inflation spike.
Advisors must frame annuitization not as a silver bullet but as a piece of the puzzle. Use annuities for essential spending, layer equities for inflation hedging, and revisit frequently.
What You Can Do Right Now
Model the cash flow impact: Show clients side-by-side comparisons of annuitization vs. drawdown.
Explain mortality credits in plain English: More people pooling risk = higher payouts.
Use behavioral framing: Turn a "loss of liquidity" into a "freedom from income anxiety."
Push plan sponsors: Advocate for optional in-plan annuitization defaults.
Stay client-centered: Don’t just quote rates. Align the annuity solution with the retiree’s real fears and goals.
Conclusion: The Puzzle Is Solvable—If We Change the Framing
Immediate annuities aren’t broken. Our approach to them is.
If we lead with value, not complexity—if we sell peace of mind, not contracts—the adoption rate will follow.
Because when 8% guaranteed income is on the table, the only real puzzle is why we’re not talking about it more.
