The increase in both market volatility and interest from the baby boomers in generating retirement income should be a slam-dunk for variable annuities. And unlike mutual funds and ETFs, sales of the products are near their pre-market crash levels.

But the recent uptick in risk aversion highlights the paradoxical dilemma of these complex instruments: right at the time investors are most interested, the product providers pull back because of the risks involved. In protecting themselves, they limit the options within the contracts, or increase the cost of riders.

“What people have heard about annuities in the past is generally not flattering,” says Scott Smith, an analyst at Cerulli. As part of a survey of retail investors, Cerulli did a sampling of opinion across all asset classes, and found that 38% of households did not even know what annuities were.

For the 35% who knew what they were, but were not familiar with them, the responses were generally negative. Investors had heard from friends, on in the popular press, that the instruments were not necessary or expensive.

Rarely did investors see annuities as a good way to get insurance coverage of to diversify assets. And yet, although certainly not for everyone, variable annuities can — when used in concert with other products — create a diversified retirement income plan.

Smith stresses that there is no “magic bullet,” or “best practice” combination of a particular annuity with a specific mutual fund or bond. He suggests that for most investors, the answer will be “something in the middle that offers some features and benefits of an annuity product.”

Smith adds that even though annuities are a difficult sell that require a lot of investor education, they can often provide savers a solid sense of security, citing the halo of good feeling investors get from knowing they have a guaranteed income stream.

“Many of these baby boomers are quite concerned,” he says. “If they've invested 100% in equities with no guarantee and the market goes down 300% — they've seen that happen twice in the last decade. They don't want that to happen again.”

Elizabeth Wine writes for Financial Planning, a SourceMedia publication.

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