It is anticipated that consumers will purchase roughly $360 billion of annuities in 2023, surpassing the prior year's total of $311 billion, according to research conducted by LIMRA. An increase in interest rates and a heightened concern about the stock market and economic climate are the primary cause for this surge. Unfortunately, the types of annuities that customers are opting for do not align with those suggested by financial planners.
Consumers invested a record amount in annuities in 2023 as a result of higher interest rates and fears over the stock market and U.S. economy, experts said. An estimate by LIMRA, an insurance industry group, suggested Americans have purchased around $360 billion of annuities in this year, greatly exceeding last year's figure of $311 billion, which itself had set a new high since the 2008 economic crisis. Additionally, increasing inflation has enabled millions to invest in products formerly intended only for the wealthy, while more retirement savers are withdrawing from their 401(k) plans.
Insurance companies are the ones that bring out annuities. People normally give a large sum of money in return for an income throughout their life, the same way as a pension or Social Security. Financial advisors may suggest them to protect themselves against the possibility of their savings running out - though some are more proficient in doing this than others. Carolyn McClanahan, a certified financial planner from Jacksonville, Florida and a component of CNBC's Advisor Council, stated, "There is all different kinds of annuities, and in my opinion, the greater part of them are not really good."
In 2023, the U.S. Federal Reserve pushed its benchmark interest rate up to the highest level in 22 years. This provided consumers with superior returns and income from annuities, remarked Todd Giesing, leader of annuity research at LIMRA. Despite the recovery of the stock market from a bad 2022, people are still worried about variables such as inflation and the economic situation, Giesing pointed out.
Consumers, looking for the security of a safe investment, are turning to fixed-rate deferred annuities, comparable to certificates of deposit. This year, these products, yielding an average rate of return of 4.5%, three times more than two years ago, constituted the majority of annuity sales with an estimated figure of $140 billion.
There appears to be a discrepancy between the kinds of annuities purchased by consumers and those typically suggested by financial advisors.In general, advisors recommend annuities as a way to counter the threat of outliving one's retirement savings due to longevity.An annuity may be employed to make sure there is enough money to cover basic needs, for example food and shelter, after accounting for income sources such as Social Security and pensions.
McClanahan, founder of Life Planning Partners, usually recommends single premium immediate annuities (SPIAs) to her clients.These annuities are the least complex, she noted. In the process, the purchaser pays a lump sum to an insurer, who then starts paying out a fixed amount each month for the rest of the purchaser's life.McClanahan stated that the "optimal time" to obtain a SPIA is when someone is in their late 70s or early 80s, at which point it becomes more evident that a retired individual who is in good health may have the potential to live for an extended period of time and run out of funds.Paul Auslander, a CFP and director of financial planning at ProVise Management Group in Clearwater, Florida, does not often utilize annuities with clients. When he does, he usually opts for SPIAs instead of the other annuities to furnish an income stream.
Deferred-income annuities (DIAs) work similarly to SPIA (Single Premium Immediate Annuity) programs, however payments are not disbursed immediately. Instead, individuals usually purchase these types of annuities in their 60s, and the annuity delivers a set monthly amount at a later age, such as 70s or 80s. This income stream is usually larger than a SPIA, but with more uncertainty around when and if the funds will be needed. Between Sept. 30th of last year and now, LIMRA recorded that $9.7 billion of SPIAs and $2.8 billion of DIAs were purchased. They also discovered that indexed annuities and variable annuities were purchased at a higher rate, with $71 billion and $39 billion respectively, though these types of annuities are usually more complicated and have higher fees than SPIAs and DIAs. Additionally, financial advisors suggest that insurance agents receive higher commissions for the sale of the more complex annuities, which could be a motivation for their sale.The potential downside to purchasing a Single Premium Immediate Annuity (SPIA) or Deferred Income Annuity (DIA) is that once money is given to the insurer, it cannot be recovered. Conversely, indexed and variable annuities come with income riders that can provide future income streams and liquidity in the event of the need to access the money earlier. However, these annuities have higher costs and more stringent regulations regarding access, making it financially expensive if the rules are breached. As McClanahan said, "It is hard to understand the 'bells and whistles' of these products, one should not invest if the details cannot be explained in two pages or less."
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