If you spend enough time looking at the way people handle their investment accounts, you eventually realize that they aren’t really looking for “total returns.” That’s a lie they tell themselves to feel smart at dinner parties. What the average person is actually looking for is a feeling. In particular, the feeling that they have found a way to stay in the casino forever without ever having to cash in their chips. This is why the industry has seen this absolute explosion of ‘income strategies’. You’ve seen the tickers. JEPI, QYLD, the whole alphabet soup of covered call ETFs. Retail investors are head over heels in love with these things. They will receive a mathematically inferior total return any day of the week, as long as you promise them a monthly check that leaves their principal “intact.” It’s an illusion, of course, a psychological magic trick where you eat the furniture to heat the house, but it keeps people invested. It keeps them from panicking when the VIX spikes because they’re too busy staring at the dividend drop.
But here the logic goes completely off track. At least for me. If you take the exact same investor, someone who says he values ”income” above all else, and you offer him an annuity, they will look at you as if you just sold him a used car without an engine. It is the great paradox of the modern financial world. We like the “income” of a fund that can deteriorate by 20% in a bad year, but we absolutely hate the “income” of a guaranteed contract that eliminates the greatest risk in human existence: outliving your money.
In Italy this is reaching a breaking point. There are people who retire at age 67, where conversion rates for second-pillar annuities are between 4% and 5.2% (according to Gemini). Certainly, this is not the case true 4%: the annual check does not correspond to inflation by law, but you should expect a revaluation of c2% every year, something that should match (or even exceed) a normal level of inflation.
The 2022-2024 inflation shock created a gap that would likely never be closed. Still, this isn’t a bad deal compared to the work someone has to put in to generate the same perpetual withdrawal rate. Actually, I’d say this is one spectacular deal compared to the cognitive heavy lifting required to generate that kind of ongoing disengagement on your own. And yet the ‘A-word’ remains the ultimate pariah of the portfolio.
The reason for this “annuity hatred” is not a math problem; it is a hardware problem in the human brain. We suffer from what researchers call a huge gap in “lifespan literacy.” A study recently published in Investment Magazine shows that most of us are living with a serious case of survival pessimism. If you ask a woman in her 50s how long she thinks she has left, on average she will reduce her own life expectancy by eight years. If you think you’ll check out at age 80, an annuity feels like a “death bet” where the insurance company is banking on you tripping over a rug. You see it as a gamble that you will probably lose, and not as an insurance policy that you probably need. It is the only insurance product in the world where people get angry if they cannot use it. You don’t get mad if your house doesn’t burn down, but for some reason we feel cheated if we don’t live long enough to “win” the annuity.
In fairness, I should add that car or home insurance is so common because it is largely mandatory. People skip home insurance if they can, despite the catastrophic consequences if something were to happen. So we are not that far away from what we see with annuities.
I think Bob Seawright, at The Better Letter, addresses this well when he talks about “Wealth Identity.” For the private investor, this “pot of money” is not just a tool; it’s their skin. It’s their safety. Taking that $500,000 savings pot and turning it into a $3,000 monthly check feels like putting on a “liquidity straitjacket.” Even if you have plenty of other savings, the idea that you can no longer “turn” or “touch” that particular pile of capital creates a tremendous amount of anticipatory regret. We obsess over the “early death” scenario, the fear of dying at 72 and “losing” principal, while completely ignoring the “longevity” scenario of living to 98 and eating cat food because our “flexible” portfolio ran out of gas a decade ago.
And don’t get me started on the “legacy motif.” Everyone claims they want to leave a legacy. They don’t want the insurance company to ‘steal’ from their children. It sounds noble, right? But it is often a convenient excuse for irrational behavior. They’ve spent decades voting for policies that effectively sell out the future of the next generation, but suddenly, when it comes to their retirement income, are they obsessed with the well-being of our heirs? Please.
It is irrational rational behavior over and over again. The I am a “better than average” driver. They vote to fuck heirs of others to protect their own asses, but then they suddenly worry about their children’s future. When their ‘children’ are already in their sixties…
The reality is that an annuity is the only thing that actually gives you the license to spend. If your floor is covered for as long as you breathe, you can be more aggressive with the rest of your belongings. You can give money to your children while you are still alive so that they enjoy it.
In Europe, and especially in Italy, we are dealing with a generation that grew up in a world where the state took care of the longevity risk. The INPS was the ultimate annuity. But that world has disappeared and financial education has not caught up with reality. People are paralyzed by the complexity of the math and fooled by misunderstanding the risks. They remember the 5 to 8% commissions that the industry’s ‘scammers’ have been able to live on for years and run with it.
There is a fundamental ‘wealth versus income’ identity crisis underway. As Blanchett and Finke pointed out in their research, we’re fine with spending money from a steady income stream like a pension, but we’re terrified of the transaction required to create one. We love the outcome, but we hate the exchange. We want the golden eggs, but we are pathologically attached to the goose, even though the goose gets older and sicker every year. Or, let’s say, it’s a goose that requires in-depth professional knowledge to stay healthy.
Until we stop seeing our capital as “chips at the table” and start seeing it as fuel for a journey that will likely take much longer (and full of surprises) than we think, we will continue to make the same suboptimal choices. We will continue to chase the illusion of income in ETFs while running from the security of it in an annuity, all because we would rather feel like we are in control of a sinking ship than admit we need a lifeboat.
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