Displaying items by tag: variable annuities

(New York)

Most people don’t think about annuities much when rates tumble, but those who are in the market for them sure see a difference. For example, when rates plunged at the start of the pandemic many annuities providers had to significantly scale back the payouts they were offering. Since annuities payouts are highly dependent on rates, insurers need to adjust their offers as yields move. With that in mind, if you are thinking about annuities, it might be a good time to buy. For example, Prudential just announced it was eliminating all its variable annuities with guaranteed income benefits because of super-low rates and volatility. Other major insurers are likely to follow suit as the market environment makes offering these products difficult.

FINSUM: Despite the fact that yields are rising, it is starting to feel like annuities providers are throwing in the towel on some products because of the ultra-low income they can provide and the potential volatility in yields.

(New York)

A combination of factors have thrust annuities into the spotlight recently. These include super low interest rates, market volatility, and a major demographic trend of retirees. With that in mind, instead of talking about annuities’ benefits, we thought it would be worth some time to focus on their downsides. Given the audience of this article (advisors), we will leave out some of the ways annuities have been mis-sold and focus on the underlying products. In terms of their core drawbacks, there are essentially three: limited upside, surrender fees, and fixed payments. Limited upside should be fairly obvious, but most annuities limit the potential upside buyers can earn in exchange for principal protection and/or fixed payments. Surrender fees are another issue, as buyers can be hit with 7-10% “surrender” fees if they try to get out of the contract and receive their principal back. And finally, fixed payments lose value quickly, especially over a long-time horizon, because of inflation.

FINSUM: Annuities are as useful as the client you are selling them to. They definitely have a role in a portfolio, but their risks and benefits need to be well understood—which has not always been the case! One key issue is that many times the same reason people need annuities—retirement cash flow security—means they are at risk of exercising one of annuities biggest downside: surrender fees.

(New York)

Most investors don’t fully understand the differences and benefits between fixed annuities, variable annuities, and fixed index annuities, so it is only natural that most clients would not even begin to understand deferred annuities and their benefits. Deferred annuities work just like other types of annuities except they explicitly defer any payouts for a set number of years. It is essentially a lump sum that gets invested, with no planned withdrawals for, say, 20 years. In many ways that makes them like an IRA. These can be very useful for clients who have are conservative in their outlook, have a nest egg to buy an annuity, and don’t need income right away.

FINSUM: In our view this is a perfect product for Millennials and Gen X who are 15 years or more from retirement. It is like a self-funded IRA and completely fits with Millennials’ bearish view of markets and the economy. It may also be a good choice for clients who tend to overspend, as this can do a good job protecting them from themselves.

(New York)

Annuities have seen a pickup in interest over the last year. At first this was because of the big drop in markets last spring, but as the year progressed annuities picked up steam because of ultra-low interest rates, which effectively rob retirees of income. For those who want rock solid guaranteed steady income, fixed annuities work best. But for many, especially those can afford some risk to the exact of income they will receive, variable annuities can work very well. Most variable annuities have a couple critical features—they allow you some degree of investment selection, if not total control, and they often guarantee your principal (though not interest income). What this allows is higher payouts if the market does well, but still a guarantee you won’t lose your principal. For those who want the safety of an annuity, but still some income upside because of market growth, variable annuities can be a good choice.

FINSUM: Annuities have some strong demand behind them right now and only seem likely to do better as rates stay low and more Boomers enter retirement.

(New York)

With interest rates so low there has been increasing interest in the role that annuities can play for those near or entering retirement. Bonds just aren’t playing the dual roles of safe haven and income source that they once did, and annuities are a naturally inheritor of that role for the foreseeable future. However, one thing that many are not clear about is how well fixed and variable annuities can work together. While fixed annuities offer guaranteed income, they are susceptible to inflation. Accordingly, many retirees might also want to have some upside that will allow their payouts to move higher. Enter variable annuities, which can offer enhanced income in up markets (but do risk lower payments in down markets).

FINSUM: Fixed and variable annuities work well as a pair. The portion invested in fixed offers guaranteed income, while the variable portion offers upside potential.