Why more Americans are buying retirement annuities

Sales of annuities, a financial product that can provide a lifelong income stream in retirement, are breaking records as Americans try to maintain high interest rates.

According to trade association LIMRA, sales of one type of annuity in particular, fixed-rate deferred annuities, have more than tripled over the past two years, rising to $164.9 billion in 2023 from just over 50 billion dollars in both 2020 and 2021.

With annuities, you pay a lump sum to an insurance company to receive monthly payments for life that begin on an agreed-upon date, which Americans commonly align with their retirement. Annuities with deferral periods are popular for people in their 50s and 60s who want a product that will grow tax deferred before converting it into a steady income stream.

Fixed-rate deferred annuities are the “most basic product” among different types of annuities because they grow at a guaranteed annual rate, says Chris Blunt, CEO of F&G, an annuity provider that is a subsidiary of Fidelity. His company has seen 46% growth in the industry over the past year, thanks in part to more attractive rates.

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In 2022, rates were in the range of 2.5%, Blunt says. But last year they soared and now stand at around 4%-5%.

Fixed-rate deferred annuities are behaving similarly to certificates of deposit (CDs), which also provide guaranteed returns at rates that typically move in lockstep with the Federal Reserve’s rate decisions.

With inflation cooling and the Fed possibly planning to cut rates in 2024, people are taking what may be their last chance to get a rate close to 5%.

Unlike CDs, however, annuities are not insured by the Federal Deposit Insurance Corp. (FDIC) and typically come with higher fees as well as a 10% early withdrawal penalty for distributions before age 59½. These are clear trade-offs, but in exchange you can usually get a better rate with an annuity than with a CD.

Annuity sales broke records in 2023

Bryan Hodgens, head of research at LIMRA, says the first jump in annuity sales occurred in late 2022 and early 2023 when interest rates were rising amid high inflation.

“When these pretty dramatic increases in interest rates occurred, consumers could now get much higher rates on these fixed annuities,” he says.

Rates have risen largely because annuity companies invest your dollars in bonds and other securities, which generate higher returns. Annuity companies have been quicker to react to changes in market conditions and adjust their rates than banks offering similar products, according to Eric Henderson, president of Nationwide Annuity.

“As the Fed raised rates, banks tended to be slow to raise CD rates while the insurance and annuity industries moved faster, so I think that’s what caused the surge in the first place,” says Henderson.

He adds that this was the time when recession fears were peaking, meaning there was strong demand for safe places to stash money that offered returns without the stock market risk. Of course, a recession didn’t materialize, and “it would have been better to actually invest in the market, but you didn’t know that at the time,” Henderson says.

Hodgens says the fourth quarter of 2023 marked a second big spike in annuity sales. Sales have boomed again more recently because the Fed indicates that rate cuts are on the horizon, which pushes people to buy while current annuity rates are still available.

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Higher rates create opportunities for pension savers

It’s not just fixed-rate deferred annuities that are hot, Hodgens says, pointing out that fixed indexed annuities and registered indexed annuities (RILAs) are also selling at record levels. Like fixed-rate deferred annuities, these products are common tools for retirement planning and are more attractive in a high-interest rate environment.

With fixed indexed annuities, you don’t have a constant rate of return like with the fixed-rate variety. Instead, they are tied to indices like the S&P 500, but your principal investment is guaranteed, meaning you can’t lose money. In return, the upside, or how much you can earn, is limited.

RILAs are almost identical, except that instead of not being able to lose money, the insurance company agrees to absorb the first 5% or 10% of the loss if the index falls in a year, Butler says. There is still a limit to the upside, but it’s not that big.

Annuities are not the right retirement planning tool for everyone: some come with high fees, and alternative retirement savings options can offer more flexibility or potential higher returns. But they can be attractive to people who want a lifelong income stream. One strategy is to combine annuities with Social Security so you can provide a level of comfort – or at least income – in retirement.

While there’s been a lot of talk about the pain consumers are having to endure due to high interest rates, annuities are a good example of how some unique opportunities in fixed income have also emerged to prepare for the future, Hodgens says.

“Most Americans loved their retirement plans, it’s just that most of us don’t have a retirement plan anymore,” Blunt says. Annuities, however, can provide the same peace of mind that you won’t outlive your savings.

“This can be a game changer in an overall financial plan,” he says. “It gives people more courage to be a little more aggressive with the rest of their savings.”

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