Displaying items by tag: annuities

According to a study of retirement accounts by Fidelity, most older Americans are too heavily invested in the stock market. This is a potential risk especially in the event of a market downturn. 

 

One posssible solution is for investors to increase their allocation to fixed indexed annuities. These are annuities that guarantee the principal but offer more growth potential than traditional fixed-rate annuities. They are best suited for investors with a time horizon of longer than 5 years. They are less risky than equities but offer higher returns than most types of annuities.

 

Fixed indexed annuities follow a market index such as the S&P 500 or Dow Jones Industrial Average and interest is deposited based on annual gains of the underlying index. However when the index declines, there is no loss of principal or of previously accrued interest. 

 

Of course, there is no free lunch. The drawback is that most fixed indexed annuities have some sort of formula which limits the amount of gains that are captured. There is also a maximum rate of interest which limits the amount of total gains that can be captured. For instance, some have a maximum rate of interest of 12% which means that the annuity would only see a gain of 12% even if the underlying index was up 20%.  


Finsum: Fixed indexed annuities are one potential way that older investors can reduce portfolio risk and boost diversification. 

 

Published in Wealth Management
Friday, 03 November 2023 14:38

The Role of Annuities in Retirement

Demand for annuities has soared along with rising rates. Owners of annuities, prior to 2021, would be very happy if they purchased variable annuities which increase along with inflation, while those with a fixed annuity would see the purchasing power of their income diluted by inflation.

 

Despite the risks, annuities are a great option for clients with low levels of risk tolerance and who value the certainty of having an income. The biggest benefit is for clients who don’t want to worry about not having enough income, or how the financial markets are performing. 

 

According to Kirsty Anderson, the pensions specialist at M&G Wealth, “An annuity gives absolute certainty. You know exactly how much income you’ll receive, and you’ll receive this for the rest of your life – unless you’re purchasing a fixed term annuity.” Currently, the average annuity rate is 6.7%. This is nearly 50% more than the average rate since the financial crisis. 

 

There is a wide variety of annuities to fit the needs of clients. Some options include varying durations, flexibility, and protection against inflation. Many clients will opt for a blended approach, when they use annuities to cover basic living expenses while keeping the remainder of their money invested in the markets. 


Finsum: Annuity sales are strong due to high rates and nervousness about the economy and inflation. Here are some considerations for annuities in retirement planning.

 

Published in Wealth Management
Tuesday, 31 October 2023 03:42

Annuity Sales Surging

The combination of high rates and an uncertain economic outlook have resulted in record sales for annuities. In the first three quarters of the year, total annuity sales were up 21% compared to last year for a total of $270.6 billion according to LIMRA’s US Individual Annuity Sales Survey. To compare, there was a total of $255 billion in sales in 2021 which was the last year of the ZIRP era.

 

In Q3, sales were up 11%, reaching $89.4 billion. LIMRA is forecasting another record year of sales for 2023, exceeding 2022’s record sales of $313 billion. Within the category, fixed indexed annuities continue to dominate, accounting for $23.3 billion in sales in Q3, a 9% gain from last year. YTD, these annuity products have accounted for 26.5% of total annuity sales.

 

Single premium immediate annuities and deferred income annuity sales saw the biggest increases at 20% and 88% compared to last year’s Q3, respectively. LIMRA is bullish on income annuities which tend to rise with interest rates. According to the group, “Income annuities will hit record levels in 2023, with sales in this category expected to exceed $16 billion for the year.”


Finsum: Annuity sales are hitting new records. Most of this can be attributed to the rising rate environment and risk-aversion among many investors.

 

Published in Wealth Management
Thursday, 12 October 2023 06:40

Why This Is the Perfect Time for Annuities

Financial advisors have so many considerations as they guide their clients into a secure retirement. Increasingly, ‘longevity risk’ is an essential factor since people are living longer lives. Obviously this is a positive, but it does mean that plans need to be appropriately adjusted.

 

Kelli Hueler, the CEO and founder of Hueler Cos., believes that annuities can often be an effective solution to bridge the gap. She is an advocate for lifetime annuity products and believes the current marketplace is the best it's been in decades. 

 

For some time, there had been a bias against annuities from investors and advisors, but this thinking is being challenged especially as we are in a new economic regime of high interest rates and stubbornly elevated levels of inflation. Therefore, the same strategies that worked from 1980 to 2020 when rates were constantly drifting lower, may no longer work. 

 

In addition to longevity risk, the dearth of pensions is another reason that the demand for annuities should continue to rise. And, possibly the most important factor is that due to high rates, annuities are actually paying out meaningful income streams to owners. While there are many downsides to the current economic environment, one silver lining is that annuities are offering a low-risk, robust value proposition. 


Finsum: There are many downsides to the current economic environment, yet one silver lining is that annuities are once again offering healthy income streams to owners.

 

Published in Wealth Management

One of the best real-time measures of the population’s interest in a subject can be gleaned through Google search data. Since the start of the year, searches for the topic are up by 50% and continue to climb with rates. In fact, there is a 0.9 correlation between search volume and longer-term rates.

 

According to Standard Life, interest in the topic really accelerated once rates exceeded 4%. Currently, many annuities are offering returns in the 7% to 8% range which is leading to strong demand from retirees or those close to retirement who are looking for income. 

 

Recent months have seen rates continue inching higher, while inflation expectations have moderated. Higher real rates are also adding to the appeal of annuities given concerns about the economic outlook and costs.

 

Two more contributing factors behind annuity demand are pent-up demand and demographics. For more than a decade, rates were so low that annuities simply didn’t deliver sufficient returns for investors or retirees. Instead, monetary policy was designed to push them higher up the risk curve in order to generate yield. 

 

Demographics also can’t be ignored. Next year, 12,000 Americans will be reaching retirement age every day. And by 2031, 70 million Americans will be above retirement age. The population is even older in Europe and Japan and will likely be interested in boosting their income during retirement. 


Finsum: Google search data shows that interest in annuities has surged since the beginning of the year. It’s not a coincidence that this happened as long-term rates were breaking out to multi decade highs. 

 

Published in Wealth Management
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