3 Reasons Why Annuity Purchases Are Increasing
Fixed rate annuity purchases (which includes fixed indexed annuities) could potentially increase by as much as 35% over the next five years, and variable annuity purchases by 15%, according to the LIMRA Secure Retirement Institute (LIMRA SRI).
Over the last few years, there have been over $200 billion annually in new annuity purchases. Over one million Americans own over $1 trillion in annuities. In light of these numbers, it would seem that both accumulation- and income-focused annuities will lead the way.
The numbers speak for themselves about the popularity of annuities for the right situation when it comes to financial planning, which is why purchases are predicted to continue to increase in the coming years. Many people in the aging baby boomer population are seeking ways to plan for retirement, which can include growth potential of their money without market risk and/or a lifetime income option, and annuities could very well be that option.
All-Time Market Highs
The stock market has achieved record increases and all-time highs recently. It might make sense for a person who is getting close to retirement or already retired to diversify his/her portfolio and reduce risks.
Less than 33% of baby boomers in the 60-year age range have access to a pension, according to LIMRA SRI. They reported that approximately $30 billion was paid in the form of income from annuities in 2018. Annuities are replacing pensions for some retirees as a source of lifetime income.
Index annuity purchases continue to increase since they can offer principal protection, potential growth of the money in the account, and an optional lifetime income. And while index annuities can be a viable option for some, there are several types of annuities, each with unique benefits and use cases.
Different Types of Annuities
Annuities generally fall into three categories:
1. Variable Annuities — Money will be invested in sub-accounts still directly tied to the stock market. The value of these sub-accounts can go down if the market falls. Additional riders can be added. The fees are generally in the 2-4% range.
2. Fixed Annuities — Money can earn a return usually higher than what the banks are paying. It can be similar to a bank CD, with a certain term that is defined and a fixed rate of interest. There are usually no fees with this type of annuity.
3. Fixed Index Annuities (also known as Equity Index Annuities) — Money can be linked to different market indices. There is typically growth potential when the markets are up, but no losses when the markets are down. Owners usually have the option to withdraw a certain percentage annually if they want. The fees are generally in the 0-1% range.
Purposes of an Annuity
There are a number of reasons annuities have risen in popularity recently.
Some annuities can offer principal protection along with growth potential of your money, while others are used for a lifetime income option in the future. Other annuities offer immediate lifetime income. The lifetime income can be for the account owner and also for his/her spouse.
People are living longer. Many retirees who are retiring in their mid-60s may live well into their 80s, which can create a fear for some that they may outlive their retirement income. If you are currently in your mid-50s to early-70s, you could potentially live for another 20-30 years.
Inflation is another factor to consider in retirement. Prices will almost certainly be higher in 10 years than they are now for many items. Think about the rising costs of food, entertainment, travel, and medical costs. Having some principal protection along with growth potential can be a potentially powerful part of a financial plan.
Just like there are many different options when it comes to investing in the stock market, the key is to not be overwhelmed: do your research and ask a lot of questions. It’s important to work with a financial professional to help determine if an annuity is right for your situation and financial goals. If it is, then it can be important to select the right one, or multiple annuities, each serving a different function (protection of principal, growth potential, lifetime income now, income in the future, etc.).
Additionally, an annuity can add diversification and reduce some of the risks in your portfolio.
Consider that you can still have money invested in the stock market, and other money in the bank. When you have both a fixed or fixed index annuity and money invested in the market, you could see both account balances rise in time periods when the market is up. When the market is down, that annuity can provide a bit of a cushion to your portfolio.
There are many risks when it comes to investing, such as worldwide events that can impact the markets, the economy, unknown events that could happen at any time, and even misinformation that we all read about and see online and on television. The markets can react to this information and misinformation, which can impact your portfolio.
Discover for yourself why annuity purchases have been increasing and are predicted to continue to increase in the future.
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