Annuities: A Safe Investment Option for Guaranteed Income
The Increasing Popularity of Annuities
If you are considering adding an annuity to your portfolio, now may be a good time to get in. Americans have flocked to annuities for guaranteed income over the past year, as interest rates rose and investors looked for safety amid the market turbulence and recession concerns. Total annuity sales increased 12% year-over-year to $88.6 billion in the second quarter, according to preliminary results from Limra, an insurance industry trade group.
One of the popular products has been fixed-rate deferreds which — as the name implies — provide a fixed rate for a specific period of time. Sales of fixed-rate deferred annuities totaled $73.2 billion the first six months of 2023, a 64% increase from the previous six month period, per Limra. That’s the highest sales figure for the product in a six-month period, the group said.
“We think that the sales will continue to be strong this year. However, we’ve made the projection that for the second half of the year, we think the fixed-rate-deferred sales will start to come down a little bit,” said Bryan Hodgens, Limra’s head of distribution research and annuities research.
Factors to Consider
One factor to consider is the path of the Federal Reserve’s interest rate increases, which began in March 2022. The central bank hiked rates by a quarter percentage point in July, bringing the fed funds rate to a target range of 5.25% to 5.5%. It indicated future rate hike decisions would be data-driven and on a “meeting-by-meeting” basis. “Every investor is wondering, ‘are we done hiking rates yet,’ but ultimately, at some point, the Fed will stop hiking rates,” said Doug Ornstein, senior integrated solutions manager for TIAA Wealth Management.
Multiyear guaranteed annuities, or MYGAs, may offer higher interest rates than certificates of deposit (CDs). Earnings also accumulate tax deferred and aren’t levied until the investor begins taking payments.
Top-Yielding Fixed Annuity Products
Here are some of the top-yielding fixed annuity products — both three-year terms and five-year terms — from insurers with an AM Best credit rating of A- or higher, according to research by Cannex. The rates are based on a $100,000 premium. Insurance products, including annuities, are state regulated, so what’s available can differ from one state to another.
Annuities as Personal Pensions
Annuities aren’t necessarily a fit for all situations or all investors. For those looking for a short- or immediate-term investment, consider bonds or CDs, said TIAA’s Ornstein. “You really want to think of an annuity more as part of a retirement plan or a plan to provide income to yourself or someone else in the future for a long period of time,” he said. “It’s really a personal pension.”
Investors should have a slice of their nest egg in a fixed annuity, but no more than 40% of their total assets. TIAA Institute studies show that having about two-thirds of income from a source that is guaranteed for life has the most successful outcomes.
Assessing Costs and Risks
When buying a fixed annuity, investors need to figure out the term that works best for them. Investors should also be aware of what could happen with the annuity if they die. Some offer death benefits, but what your beneficiary will receive can vary from one contract to the next.
Another factor to consider are the costs involved. Fixed annuity costs are usually higher than those of fixed income mutual funds because of the insurance benefit they offer. Additionally, there may be surrender costs if you cash in your annuity before the surrender date. There is also the opportunity cost, which means investors could miss out on higher stock market returns for the lower, guaranteed income.
Yet annuities can also provide a tremendous amount of peace of mind. “We see that with a lot of retirees when they turn on the income from their annuities,” said Ornstein. “They can see that old-fashioned feeling of ‘I have a pension. I’m going to be OK and I can live comfortably without working.'”