If you spend enough time watching the way people interact with their brokerage accounts, you eventually realize that they aren’t actually looking for “total return.” That’s a lie they tell themselves to feel smart at dinner parties. What the average person is actually hunting for is a feeling. Specifically, the feeling that they’ve figured out a way to stay at the casino forever without ever having to cash in their chips. This is why the industry has seen this absolute explosion in “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’ll take 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’re eating 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 is where the logic completely falls off the rails. At least for me. If you take that exact same investor, someone who says they value “income” above all else, and you offer them an annuity, they’ll look at you like you just tried to sell them a used car with no engine. It is the great paradox of modern finance. We love the “income” from a fund that might decay 20% in a bad year, but we absolutely loathe the “income” from a guaranteed contract that removes the single biggest risk in human existence: outliving your money.
In Italy, this is reaching a breaking point. You’ve got people retiring at 67 with conversion rates on second-pillar annuities sitting between 4% and 5.2% (according to Gemini). Sure, this is not Bengen 4%: the annual check is not matching inflation by law, but you should expect a c2% revaluation every year, something that should match (or even surpass) a normal level of inflation.
The 2022-2024 inflation shock created a gap that would probably never be closed. But still, ain’t a bad deal compared to the work someone has to do to generate the same Perpetual Withdrawal Rate. Actually, I would say, this is a spectacular deal compared to the cognitive heavy lifting required to generate that kind of perpetual withdrawal on your own. And yet, the “A-word” remains the ultimate pariah of the portfolio.
The reason for this “annuity hate” isn’t a math problem; it’s a hardware problem in the human brain. We are suffering from what researchers are calling a massive “longevity literacy” gap. A study recently published in Investment Magazine found that most of us are walking around with a severe case of survival pessimism. You ask a woman in her 50s how long she thinks she’s got, and on average, she’ll lowball her own life expectancy by eight years. If you think you’re checking out at 80, an annuity feels like a “death bet” where the insurance company is rooting for you to trip on a rug. You see it as a gamble you’re likely to lose rather than insurance you’re likely to need. It’s the only insurance product on earth where people get angry if they don’t get to “use” it. You don’t get pissed off when your house doesn’t burn down, but for some reason, we feel cheated if we don’t live long enough to “win” the annuity.
For the sake of honesty, I have to add that car or house insurance is so common because it is largely mandatory. When they can, people skip on their house insurance despite the catastrophic consequences if something were to happen. So we are not that far from what we see with annuities.
I think that Bob Seawright, over at The Better Letter, nails this when he talks about “Wealth Identity.” For the retail investor, that “pot of money” isn’t just a tool; it’s their skin. It’s their security. To take that 500,000 nest egg and convert 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 “pivot” or “touch” that specific pile of capital creates a massive amount of anticipatory regret. We are obsessed with the “early death” scenario, the fear of dying at 72 and “losing” the principal, while we completely ignore 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 “inheritance motive.” Everyone claims they want to leave a legacy. They don’t want the insurance company “stealing” from their kids. It sounds noble, right? But it’s often a convenient excuse for irrational behavior. They spent decades voting for policies that effectively sold out the next generation’s future, but suddenly, when it comes to their retirement income, they’re obsessed with the well-being of our heirs? Please.
It is the irrationally rational behavior again and again. The I am a “better than average” driver. They vote to screw others’ heirs to protect their own ass, but then they are suddenly concerned about their kids’ futures. When their ‘kids’ are already in their 60s…
The reality is that an annuity is the only thing that actually grants you the “license to spend.” When your floor is covered for as long as you breathe, you can actually be more aggressive with the rest of your assets. You can give money to your kids while you’re still alive to see them enjoy it.
In Europe, and especially in Italy, we’re 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 is gone, and the financial education hasn’t caught up to the reality. People are paralyzed by the complexity of the math and fooled by the misunderstanding of the risks. They remember the 5% to 8% commissions that the “scammy” side of the industry lived on for years and they check out.
There is a fundamental “Wealth vs. Income” identity crisis happening. As Blanchett and Finke pointed out in their research, we are perfectly comfortable spending from a steady stream of income like a pension, but we are terrified of the transaction required to create one. We love the outcome, but we hate the exchange. We want the golden eggs, but we’re pathologically attached to the goose, even if the goose is getting older and sicker every year. Or, let’s say, it is a goose that requires deep professional knowledge to stay healthy.
Until we stop viewing our capital as “chips at the table” and start viewing it as fuel for a journey that is probably going to be a lot longer (and full of surprises) than we think, we’re going to keep making the same suboptimal choices. We’ll keep chasing the illusion of income in ETFs while running away from the certainty of it in an annuity, all because we’d rather feel like we’re in control of a sinking ship than admit we need a lifeboat.
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