Displaying items by tag: annuities

We are nearing the end of one of the most aggressive periods of monetary tightening in history. Since March 2022, the Federal Reserve has hiked 11 times, sending the benchmark rate above 5%. At the latest FOMC meeting, Chair Powell left room open for more hikes if necessary, but the overall message was that inflation was moving closer to desired levels, while the economy remained resilient. 

Most market participants are now focused on the Fed pivoting and cutting rates sometime in 2024. Therefore, it wouldn’t be prudent to hold off on investing in an annuity or other sort of fixed interest investments in the hopes of securing higher rates. In fact, we are starting to see cuts on some annuities for the first time in years, following the recent decline in longer-term yields

For most of the year, ‘higher for longer’ has been the prevailing narrative. Yet, there are many indications that we are in the final innings of the hiking cycle such as a cooling labor market and moderation in inflation. Additionally, public comments from Fed officials have indicated the need to cut rates if inflation does moderate to keep real rates from climbing even further. 

Currently, annuities are at their highest payout rates in decades. Given the likelihood that we are in the midst of a Fed pivot, prospective buyers of annuities should take advantage of these attractive rates before they start to drop. 

Finsum: Fixed annuities are quite attractive given the current level of rates. Yet, there are some signs that interest rates are going to turn lower which means that this is an opportune time to invest in an annuity.  

Financial advisors and investors seem to be speaking different languages when it comes to annuities. A recent survey paints a curious picture: while only 19% of financial professionals perceive client interest in guaranteed lifetime income products, nearly half of the surveyed investors nearing or in retirement express the same desire. This disconnect presents an opportunity for advisors to revisit the conversation and unlock significant value for their clients.

For investors approaching their golden years, the fear of market volatility and portfolio depletion is real. They seek peace of mind, knowing a portion of their income is secure, regardless of economic turbulence. Despite their complexities, annuities offer this very protection, guaranteeing regular payouts throughout retirement.

The conversation around annuities requires reframing. It's not about sacrificing growth for a fixed income stream, but about building a holistic retirement plan that balances potential future returns with guaranteed income that alleviates anxiety and fosters financial security. Advisors who bridge this gap and proactively discuss lifetime income options with their clients stand to forge deeper trust and build stronger, more enduring relationships.

Finsum: Financial professionals may underestimate their client’s interest in guaranteed lifetime income options.

Until a couple of decades ago, investors had few options when it came to asset classes. Since then, there has been an increase in the number of investable asset classes including REITs, commodities, currencies, etc. Yet so many of these have failed to provide sufficient diversification, especially during down markets.

Investors should consider fixed annuities as they offer capital protection guaranteed returns, and income regardless of market conditions. Thus, they are a way to generate income during retirement and also increase the resilience of portfolios. 

Unlike fixed income, fixed annuities do not fluctuate in value depending on interest rates or other factors. Fixed annuities always have a positive, guaranteed return. When evaluating their portfolios, investors should consider market risk, credit risk, longevity risk, and liquidity risk. 

A fixed annuity reduces a portfolio’s market risk due to there being a guaranteed return and no risk of loss of principal. It also leads to lower credit risk given that annuity providers have superior credit ratings. Longevity risk is also reduced given that annuities provide payments for life. There is a tradeoff in terms of liquidity risk as money invested in an annuity is not easily accessible.

Finsum: Fixed annuities can lead to more resilient portfolios. Although there is a tradeoff in terms of liquidity, it can reduce a portfolios’ market, credit, and longevity risks. 

Based on the most recent annuity sales data, it's a good bet they are seeking a combination of growth and protection. According to LIMRA, the financial services research and education organization, sales of registered indexed-linked annuities (RILAs) set a record in the third quarter of 2023 at $12.6 billion, up 19% year-over-year.

In a recent posting on the organization's website, Todd Giesing, assistant vice president LIMRA Annuity Research, stated that "Investors still seem focused on the value of protection and growth potential that RILAs offer."

And while RILA sales set a record, the overall annuity market is also having a good year. In the news release for their most recent U.S. Individual Annuity Sales Survey, LIMRA reported that "With economic conditions continuing to be favorable for annuities, total sales increased 11% year-over-year to $89.4 billion in the third quarter of 2023."

One additional highlight from the survey is worth noting. Fixed indexed annuity (FIA) sales were $23.3 billion in the third quarter, up 9% from the prior year's results.

Finsum: LIMRA reports registered indexed-linked annuities sales, reflecting a strong investor preference for investment growth and protection.

The outlook for the financial markets and economy is quite murky given several uncertainties such as a slowing economy, high interest rates, inflation, trouble in the banking sector, and geopolitical risk. Adding to these woes has been the poor performance of bonds. Typically, they are a safe haven during periods of uncertainty and volatility. Yet, they have suffered losses and failed to provide sufficient diversification over the last couple of years.

Thus, many are looking at other asset classes to meet these needs such as fixed-indexed annuities. The rates on these annuities are tied to the performance of an index such as the S&P 500 with much less risk. They combine the security of a fixed annuity while having some upside like an index annuity.

Most fixed-indexed annuities are structured to provide 100% protection of the principal which is especially advantageous during a market downturn. In some ways, these are more secure than bank deposits given that there is a 100% financial reserve requirement for annuity issuers while banks have much lower reserve requirements on deposits.

However, there are some downsides to fixed-indexed annuities. Relative to bonds, there is much less liquidity, as most have some sort of limits on how much of the principal can be withdrawn without incurring a penalty. There are also higher fees than simply investing in a fixed income fund. 

Finsum: Fixed-indexed annuities may be a better fit for many investors than traditional bonds especially in the current environment.