Going back to the days of the Egyptian and Roman Empires, there is evidence that annuities were created and used as a way to save, protect, defer and extend the use of money over a period of time. In those times, annuities were used to fund wars and related conflicts. Individuals would make a significant payment into the “war fund” in exchange for a guarantee that they would receive an annual payment, based and determined actuarially on the initial contribution, for the rest of their life or for a specified period of time. An actuary is someone who deals with the measurement and management of risk and uncertainty. (Yes, there were actuaries back in the Roman Empire.) Depending on life expectancy, investors could either benefit greatly from the guarantee or possibly not recoup their initial investment. As investors into the fund died off, annual payments would stop, which then remained in the fund and redistributed to the remaining investors. (Annuities today have different features that enable a continued income stream for spouses, partners or designated beneficiaries.)
The design and types of annuity products continued to morph and change over time. Annuities were first used in America in 1759 when clergymen in Pennsylvania came together to create a retirement savings plan, funded by church leaders and congregations, that would ensure a lifetime stream of income to pastors and their families. Eventually, annuities would play a role in supporting needed income for widows and orphans. The creation of Social Security in the United States in 1935 largely lives and continues based on annuity principles. American workers pay into the Social Security and Medicare system on a regular basis, accumulated over time, and are guaranteed a monthly stream of income based upon their yearly history for the rest of their lives.
Today, according to the 2013 Gallup Survey of Owners of Individual Annuity Contracts, Americans who own an annuity product have moderate incomes. Their median annual household income is $64,000, and 80% have total annual household incomes below $100,000. Most individual annuity owners are retired (65%). Although their average age is 70, the average age at which owners purchased their first annuity was 51. Individual annuity owners are almost evenly split between females (51%) and males (49%).
Why do Americans own annuities? According to the Gallup research, annuities are seen as a way to provide their owners with additional retirement income (84%) and as a financial safety net in case they or their spouse live well beyond their life expectancy (87%).
What do owners think about how important tax deferral is to saving for retirement? Most individual annuity owners believe that they have done a very good job of saving for retirement (88%). Nine in ten individual annuity owners agree that keeping the current tax treatment of annuities is a good way to encourage long-term savings
In the landscape of today’s savings and pension products, the power of annuities as a retirement savings vehicle is not fully understood by the average investor and even by financial advisors. There are many features and benefits offered by annuities, causing many investors to consider them complex and difficult to use. In our “About Annuities” section, SAFE will discuss the features, benefits and, even, misconceptions held about annuities in an easy-to-understand fashion so you can paint a clearer picture about how annuities could potentially help your future retirement planning needs.