Displaying items by tag: retirement

The ETF market continues to grow and mature by providing new funds for investors to reach their financial goals. BMO Global Asset Management sees more growth in the coming year, driven by more targeted funds that appeal to more sophisticated investors.

It sees the ETF market continuing to evolve and innovate in order to meet the growing demand for more sophisticated products in an ETF wrapper. It sees ETFs becoming the primary way for investors to get exposure to themes, trends, and investment opportunities. Further, there is intense competition among issuers to continue bringing new products onto the market, especially given first-mover advantages.

BMO is particularly bullish on structured outcome ETFs, which were created to help investors manage risk. It believes that investors in equity funds and short-term bond funds are exposed to volatility given the outperformance of megacap, technology stocks over the past year and uncertainty around the Fed’s rate cuts.

Structured outcome ETFs are one way that clients can remain invested while capping downside risk. Among these, buffer ETFs, which use options that protect against downside risk and cap upside potential, are becoming increasingly popular among advisors and investors. Notably, this type of protection was at one time only available to high net worth investors.

Finsum: BMO Asset Management conducted an overview of the ETF industry. It notes the constant innovation in the space, with the latest growth area being structured outcome ETFs, which are particularly useful in terms of reducing portfolio risk.   

Every day, 12,000 individuals from the baby boomer generation in the US turn 65, and by 2030, all baby boomers will have reached this age milestone. This demographic shift has led to a change in investment priorities, with baby boomers now seeking more protection-oriented financial products, such as annuities. Annuities offering downside protection and guaranteed returns have gained popularity over those promising high growth potential.

In 2023, the annuity market in the US saw record-high sales of $385 billion, largely driven by the demand for products with downside protection features. Fixed annuities and fixed index annuities, accounting for 67% of total annuity sales, have become the preferred choice, reflecting a significant shift from previous years. These annuities align with the risk preferences of baby boomers, offering market-linked returns while shielding investments from market volatility.

Fixed index annuities, in particular, provide an attractive option for retirees seeking stable income streams, combining potential market returns with downside protection. However, they come with limitations, including capped returns and surrender periods, necessitating careful consideration before incorporation into retirement plans.

Finsum: Demographic shifts have already had a major long-term impact on bonds, and now retirement concerns are shifting the landscape once again. 

Many investors may be looking to diversify their portfolios given recent gains in equities. While there are many options, leveraged index annuities can reduce portfolio risk while still offering some growth potential.  

Leveraged index annuities are typically bought upfront with a single payment. The interest earned on these products is not taxable until it is withdrawn, which also makes them an effective vehicle for saving.  

These annuities are leveraged to a major market index like the S&P 500. Interest is earned when the underlying index appreciates; however, there is no loss of principal in the event that the index suffers losses. 

The tradeoff is that interest earned on the annuity is capped depending on the terms of the annuity agreement. For instance, the maximum earnable rate of interest could be set at 12%. This means that in a year like 2023, when the S&P 500 was up 24%, the annuity owner’s earned interest would be capped at 12%. On the other hand, the annuity owner would have seen no loss of principal when the S&P 500 was down 19% in the previous year.  

This combination makes leveraged index annuities ideal for investors who want to diversify and de-risk their portfolios while still growing their wealth.

Finsum: Leveraged index annuities are a way for investors to reduce risk and increase diversification while still allowing for appreciation. 

Annuity sales in 2023 were up 22% compared to the previous year, reaching $355.4 billion. The biggest contributor to this growth was the independent sales channel, which now accounts for 40.6% of all annuities sold, totaling $156.2 billion. In 2022, independent agents and brokers accounted for 38.7% of sales. They also accounted for 74% of all fixed indexed annuity sales.

The growth in total annuity sales is due to rising interest rates and the large number of Baby Boomers who are entering or nearing retirement. In terms of categories, income annuities saw the largest increase in sales, at 45% for single premium immediate annuities and a 97% increase for deferred income annuities. 

While most categories saw growth, traditional variable annuities were an exception, as sales dropped by 17%. In contrast, registered index-linked annuities displaced some of these sales as the category had a 15% jump in sales. These annuities offer investors downside protection and limited upside and total $47.4 billion in sales in 2023. 

Keith Golembiewski, the head of annuity research at LIMRA, believes that RIAs are a source of future growth for variable annuity sales. These annuities offer upside potential and allow for deferral of taxes, making them ideal for older clients. Currently, RIAs are a small but growing source of annuity sales. 

Finsum: Annuity sales hit new record highs in 2023. Some major reasons are an uncertain economic outlook, Baby Boomers nearing retirement, and high interest rates. 

In the face of escalating inflation, Americans are increasingly longing for the retirement security once provided by pensions, a sentiment reflected in a survey revealing widespread concerns about the reliability of existing retirement plans such as 401(k)s.

 This shift away from traditional pensions stems from their expense and risk for companies, leading to the widespread adoption of defined contribution plans like 401(k)s, which place the onus of retirement planning on employees. However, the recent surge in inflation has exposed the vulnerabilities of 401(k)s, particularly for older adults nearing retirement. 

To address this, there's a growing interest in annuities, which offer a guaranteed income stream and can be seen as a modern iteration of traditional pensions. Annuities, available in various forms including fixed and variable, provide retirees with a way to insure their income stream, offering stability in an uncertain financial landscape and potentially bridging the gap left by the decline of pensions and shortcomings of 401(k)s.

Finsum: Annuities can offer a more secure return and replace the void left by pensions for many Americans.