Displaying items by tag: annuities

Wednesday, 21 February 2024 13:33

Annuities Are Supercharging Debt Markets

Annuity sales reached a record $385 billion last year, up 23% from the previous year, driven by a growing demand for retirement income security amidst rising interest rates. To meet this demand, life insurers are investing in corporate debt and commercial mortgage bonds to fund these products.


Despite recent declines in bond yields, annuity sales are expected to remain strong due to demographic factors and higher interest rates, maintaining tight valuations in the investment-grade corporate bond market. Fixed-rate deferred annuities, especially popular among those nearing retirement, saw their best-ever quarterly sales of $58.5 billion in the fourth quarter of last year, indicating sustained demand among individuals approaching retirement age.


Looking ahead, annuity sales are likely to continue robustly, supporting corporate debt markets and providing stability to investment-grade corporate bonds and commercial mortgage-backed securities. This trend underscores the enduring appeal of annuities as a favored choice for individuals seeking guaranteed income in retirement and highlights their role in shaping the landscape of financial markets.

Finsum: Expect annuities products to continue to have very high demand for the foreseeable future given the aging U.S. population, and this shows fixed income demand will also increase as a result. 


Published in Wealth Management
Thursday, 15 February 2024 14:27

How Annuities Can Enhance Retirement

Having a steady source of income during retirement is a universal goal. According to a new research paper from Wharton, investors should consider a deferred income annuity product in their retirement accounts as this has shown to improve welfare for all groups when accounting for sex and education level.


Optimally, Americans would wait until they turn 70 before starting to receive Social Security payments, as it would lead to the biggest monthly check. Yet, most don’t for various reasons including a need for additional income, not wanting to work till this advanced age, and failure to plan properly. 


One potential solution is a deferred income annuity which would allow prospective retirees to bridge the gap and create extra income in their 60s. This would increase the chances that they would be able to not claim benefits till age 70 and maximize income from Social Security. 


These findings are especially relevant following the passage of the SECURE 2.0 Act in December 2022 which was created so employers would offer some sort of lifetime income payment option in 401(k) plans. The paper adds that options should also include a variable deferred income annuity with equity exposure in addition to fixed annuities. 

Finsum: Ideally, retirees would be able to put off receiving Social Security payments until they are 70. One way to increase the odds of this are to include annuities in retirement plans to create income during interim years. 


Published in Wealth Management
Monday, 12 February 2024 05:16

How Fixed Indexed Annuities Can Help Retirees

Retirees have many options when it comes to generating income from their portfolios. Each approach comes with its own tradeoffs in terms of yields, risk, and liquidity. In recent years, fixed indexed annuities have become increasingly popular as they generate higher returns than traditional investments, while offering protection during periods of poor market performance.


Fixed indexed annuities are issued by insurance companies. It provides a guaranteed return while also earning additional interest based on the performance of a specific index such as the S&P 500. Like most annuities, they also allow for tax-free compounding. 


One of the major advantages of a fixed indexed annuity is that it reduces the downside risk of a decline in markets which can be more damaging to retirees. Research shows that these products deliver strong returns over long periods of time, although they do underperform during booms. 


If an investors’ goals are to generate more income while reducing the overall risk in the portfolio, then a fixed indexed annuity is a prudent option. When determining whether a fixed indexed annuity is the right choice, a major factor is what it will be replacing in the portfolio. 

Finsum: A fixed indexed annuity can help investors generate more income from their portfolios while also reducing risk. Downsides are less liquidity and underperformance during periods of strong market performance. 


Published in Wealth Management
Thursday, 01 February 2024 04:05

Research Investigates Why Annuities Are Under Owned

The Center for Retirement Research at Boston College recently completed a study which investigated why annuities are under owned despite the benefits it provides for retirees. The findings are particularly interesting for financial advisors given this wide gap and persistent challenge. 

The study queried investors with more than $100,000 in financial assets who are in or near retirement. About half of the respondents indicated some willingness to buy an annuity at current rates, while only 12% actually are invested in one. 

Interestingly, the study also found that a lack of liquidity or the inability to pass on an annuity as an asset to heirs were not cited as reasons to not purchase an annuity. Instead, the major factor was a lack of knowledge of the product and how to buy one. Some who were more familiar with the product had a negative perception of hidden costs and performance issues.

According to the authors of the study, the reluctance to buy one stems mostly from psychological reasons. Advisors should endeavor to provide more detailed knowledge about these products including the mechanics of how they work in order to increase comfort levels. Then, they should share an action plan of how to actually buy an annuity. 

Finsum: Most retirees acknowledge the benefits of owning an annuity and self-report a desire to invest in one. Yet only 12% of retirees own an annuity despite the benefits. Some research on this gap came up with some interesting findings. 


Published in Wealth Management
Sunday, 28 January 2024 04:42

Are Tax-Deferred Annuities Worth It?

The most common reasons to choose a tax-deferred annuity are that it allows for accumulation while also ensuring security. Since taxes are delayed till retirement, there is more compounding to augment returns. Upon retirement, the annuity payouts begin. The downside is that these vehicles can underperform during periods when market returns are robust. Additionally, inflation above historical averages would also erode the purchasing power of annuity payouts. 


In contrast to tax-deferred annuities, immediate annuities involve a single lump-sum payment and then payments begin, typically, within a year of purchase. Deferred annuities work differently. After the purchase of the annuity, regular contributions are made. The value of the account grows due to these contributions and earned interest. 


Once the deferred annuity buyer is ready for payments, typically during retirement, the annuity seller begins making payments depending on the terms of the annuity and the total amount of funds accumulated in the account. 


Ordinarily, earned interest is taxed. This is not the case with a tax-deferred annuity. The result is more compounding and principal growth. However, taxes do have to be paid on income received from the annuity or on the accumulated interest, depending on the structure of the specific annuity. 

Finsum: Tax-deferred annuities offer certain advantages such as more accumulation and security. But there are also some disadvantages such as underperformance vs the broader market and inflation eroding the purchasing power of payouts.


Published in Wealth Management
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