Broadly speaking, an annuity is sold as a contract between a consumer and an insurance company. The buyer commits to a specified payment arrangement, and the company promises to pay the insured a lump sum or payment schedule. Payouts may begin immediately or in the future, depending on what is purchased. The amount of benefits paid hinges on the type of annuity purchased and the size of the insured’s investment. A death benefit may be built into the annuity, and a few may apply if funds are withdrawn early.
Why consider purchasing an annuity?
When the market crashed during the pandemic in 2020, individual investors got a clear view of how quickly gains can disappear. Also, Deloitte reports, annuity sales declined 24% in the second quarter of 2020 as compared to the same period in 2019. By the fourth quarter of 2020, however, annuity sales had begun spiking and LIMRA, financial services researcher, has predicted a rebound in 2021. Why?
People are seeking ways to safely grow their nest eggs because low bank rates are not delivering desired returns. For example, during the week of July 14, 2021, Bankrate reported that the average interest for a:
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One-year CD was 0.17%.
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Five-year jumbo CD was 0.32%.
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Money market account was 0.07%.
By contrast, the average annual stock market return is 10%, according to Nerdwallet. But stock market investments do not come with guarantees.
As such, investors, particularly those under the age of 55 and those without pensions, are considering annuities. This is according to a 2021 study from the retirement education nonprofit, Alliance for Lifetime Income (ALI), and CANNEX, which provides pricing, data and research for retirement and savings products in North America. Surveyed were 602 financial professionals and 1,519 investors age 45-75 who had more than $100,000 to invest. Their answers revealed:
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Of the investors under the age of 55, more than half (55%) are considering annuities as part of their retirement strategy.
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Among investor respondents aged 45–54, 71% expressed interest in using annuities for retirement planning.
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The financial professionals who were surveyed acknowledged that consumers need protected income for their retirements, and 45% are incorporating annuities in client accounts.
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Younger baby boomers (ages 55-59), who will be among the first age group to mostly rely on a 401(K) or IRA for retirement, are more interested than older investors in having an annuity.
Is an annuity right for you?
Agent® is a trained professional who can help you determine if annuities would be suitable for your retirement needs. If so, your agent can help you weigh your options and assemble a customized plan, whether that means buying a standalone or a mix of annuities. These are the three basic categories of annuities sold by insurance companies:
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Fixed annuities are highly predictable as the contract with the insurance company locks in a payment rate. The Corporate Finance Institute explains that these products are designed to deliver a specific income to the insured when they retire, and tax on the growth is deferred until money is taken out of the account. The insurance company assumes the risk if there is a market downturn.
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Variable annuities are an alternative that allow the annuity owner to realize additional gain from the product if the basket of funds or securities invested in by the insurance company performs well. The opposite is also true if the investments do not perform well—which could mean some losses in the event of a market downturn.
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Indexed annuities pay interest to an annuitant based on how a specified market index, such as the S&P 500, performs. Indexed annuities are also called equity-indexed or fixed-indexed annuities.
Annuities can augment your Social Security income, pension (if you are fortunate enough to have one) and other investments to create a more stable source of income for your retirement years or for your family in the event of an untimely death.
Why not discuss your situation, financial plans and a potential investment in annuities with your Trusted Choice agent?