Annuities may be enjoying unprecedented popularity in this time of economic uncertainty and rising interest rates. But that doesn't necessarily mean every advisor should
LIMRA, an industry-funded research group, reported this summer that annuity sales hit a record high of $182.7 billion in the first half of the year, showing a nearly 28% year over year increase. Todd Giesing, assistant vice president for LIMRA annuity research, said
For people who are approaching retirement age or are already retired, annuities present a means of investing savings without taking on the risks associated with stocks. Hence their popularity in a year
So
The drawback, Damsky said, is often a lack of liquidity. Most annuities oblige investors to tie their money up for a set period of time — often between five and 10 years. Those who pull their savings earlier are hit with so-called surrender charges.
"If you have to lock your money up, it raises the stakes," Damsky said. "There's a cost to that lack of liquidity. So you really want to make sure you are getting something over and above."
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Annuities also often come with fees that investors may find difficult to understand. And the insurance brokers who sell them
Damsky said there are ways to achieve returns similar to those seen with annuities — many of which yield between 5% and 6% a year now — without losing access to your money. One strategy his firm uses is to invest clients' money in dividend-paying stocks. Although dividends can be reduced or eliminated, they tend to be less tied than stocks to general economic conditions. That's why many view them as a stable source of income even during downturns.
Damsky said bond interest can serve the same purpose. He said he and his partners will also advise clients to sell a portion of their stock and bond portfolios every year as a way to generate cash and obtain "synthetic" dividends.
Damsky said the great attribute of the public stock and bond markets is that they are fairly straightforward. The same can't be said for annuities, he said.
"A lot of folks, they might understand them at a high level but not understand the nitty gritty," Damsky said. "How can I get out of this thing early if I need to? What are the costs for doing that? And what's the timetable for doing that?"
Damsky said he hasn't ruled out annuities as an option for clients. He just almost never finds a reason to recommend them.
Don Roy, the founder of New England Wealth Advisors in Bedford, New Hampshire, said he once had the same skepticism. But fairly recent changes in annuity products have helped convince him that annuities can be a good fit for some clients, especially those who are nearing retirement and feel that they'd be gambling with their hard-earned savings if they invested in the stock market.
Roy, who has been in the industry for 38 years, said he tends to prefer what are known as fixed-index annuities. These products tend to be tied to broad market indexes like the S&P 500 but offer protections against losses that make them less volatile than investments in stocks.
Roy said he has advised some clients to invest in fixed-index annuities that provide a guarantee against losses in return for a roughly 10% cap on gains in any given year. Such products proved a good way to preserve savings in a year like 2022, when the S&P 500 was down nearly 20%. The tradeoff is that investors give up some of the gains they would have made had they invested directly in the S&P index, which is up roughly 18% year to date.
The loss of potential gains, Roy said, is why annuities are generally best left to savers who are approaching retirement or are already retired. They tend to be the clients who have the most interest in preserving the money they've managed to accumulate rather than place riskier bets in the hopes of seeing it grow.
"If you have enough savings to meet your retirement goals, then it becomes a matter of, 'Let's not go backwards. I don't want to give back money," Roy said. "Then protection becomes more paramount than upside."
Roy said one of his biggest difficulties with annuities lies in the need to sort through the many products on offer to find the few that best suit his clients. For help with that task, he relies on a service offered by
Roy said SIMON brings together a wide variety of information on annuities, including their fees, their surrender charges and surrender periods, if there are any. The service also allows advisors to "back test" the performance of different products, or see how they would have hypothetically performed if they had been held by a client for a specific period in the past.
"There are usually quite a few choices in most product categories," Roy said. "Most times I'll end up with probably eight to 10 pretty solid companies."
LIMRA figures suggest fixed annuities have been hot sellers while instability in the stock and bond markets continues to push savers to seek out alternative investments. The organization reported in July that $48.5 billion worth of the fixed-index products sold in the first half of 2023, a 35% year over year increase.
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A related type of annuity, the registered index-linked annuity, is also popular. These products, which allow investors to set "buffers" limiting how great their losses will be in down markets while also setting caps on gains, saw their sales increase by 8% year over year to hit $22 billion in the first half of 2023.
Giesing said LIMRA demographic data bears out the idea that annuities are favored by investors who are either on the verge of retirement or are no longer working. Purchasers tend to be in their early 60s, he said.
Giesing noted as the average age of the U.S. population rises, the country is expected to see 8 million more people come into the 65-and-older group in the next five years.
"As we get a larger pool of potential clients, it's going to be a boost for the annuity market, as people are layering either protection or guaranteed income into their retirement portfolios," he said.
Sean Rawlings, the founder of WealthBound Advisors in Paradise Valley, Arizona, said he seldom recommends annuities to clients. But that's not because the products are inherently flawed.
It's instead that the millennials he primarily works with are usually in the stage of their careers when they should be willing to take some risks in the hope of seeing big returns.
"It basically comes down to their ability to tolerate risk," Rawlings said. "For anyone who is under 40 or is 10-plus years away from retirement, I don't think an annuity fits into that picture."
But whether or not annuities have a place in young people's portfolios, Giesing doesn't see the recent surge in sales as a fluke. Even if the pace of transactions slows in the second half of the year, he said, the high bar set in the first half means "we are anticipating record levels again for 2023."
