Displaying items by tag: retirement

There has been an explosion of annuity interest by investors, a lot of that is being driven by the low-interest-rate environment and increased uncertainty more broadly. Health is a key factor in an annuity purchase, but a healthier individual will receive lower payments so they may want to delay their annuity purchase. If you are seeking a deferred annuity, however, then you may want to purchase it sooner and annuitize later in order to grow the value if it has a guaranteed interest. Finally, inflation can eat at the value of a fixed annuity which means it might devalue your payment stream later on. The optimal purchased time for a fixed annuity is generally a couple of years post-retirement: 70-75. A deferred annuity should be purchased much younger, the optimal age being in the mid-40s.

Finsum: Consult a financial advisor as to which annuity timeline makes the most sense for your portfolio.

There has been a serious increase in interest in annuities during the pandemic, but overall the product suffered as retirements got put on hold. Bond market disruption has increased that excitement and Legal and General, a British provider, is expecting a big turn around with the pandemic in the rear view. They have already seen a 5% uptick in since the onset of the pandemic. A full recovery is underway and retirement is back on the agenda for many investors, which makes annuities attractive again. Additionally data around savings rates and flows are trending positive for annuities as well.

Finsum: Annuities are just the better alternative for many retirees when the interest rates and inflation are in the position they are now.

The 2019 Secure Act was THE critical piece of legislation for annuities in the 21st century, but that could change with the upcoming LIFE Act which is working its way to voting. Where the secure act made legal production of annuities easier and allowed them to be a part of retirement plans, the LIFE Act will allow annuities to be a 50% asset allocation by default from employers. Currently, the LIFE Act has strong bipartisan and posts a strong potential of passing, this would allow investors to double their baseline investment in annuities where it was previously capped at 25%.

Finsum: The ultra low rate environment has many investors more interested in turning to annuities for income than almost any other time before.

Annuities have had rapidly growing interest in the post covid era, and this has been especially true for variable annuities. What makes variable annuities attractive is inflation and interest rate risk which will elevate their value, however, for annuities providers and insurers, this is represented as risk. In an action to mitigate those risks Aegon, the parent company to Transamerica, engaged in a buyout program that ended in January. In total 18% of annuity holders capitalized on buybacks to settle their portfolio. Transamerica also expanded its hedging strategies to ensure against interest rate and equity risk for the remaining balance of its variable annuity portfolio.

Finsum: Recent legal changes have drastically affected the insurance and annuity industry which has been key to their growing demand, in addition to the covid-19 pandemic and rising subsequent unemployment.

Annuities are one of the safest financial securities that exist, but that doesn't mean they are without some risk. Sure one of the biggest risks to an annuity is dying early, but there are other external risks like liquidity. Annuities are among the most illiquid contracts and often come with heavy penalty fees in withdrawals. Additionally, if an annuity company goes bankrupt they aren’t regulated by FINRA, and state and local insurance agencies only cover between $250,000-500,000 in losses. In the current environment, inflation growth is a substantial risk to annuities because it devalues the future payment stream in a fixed rate annuity, and even if the Fed raises rates to curb inflation this will only make it a less attractive yield in comparison to the market.

Finsum: Overall, annuities look like one of the safest securities and variable rate annuities may mitigate interest rate risk.