Pensions, which protect against stock market losses, are rising sharply this year
Annuities have historically gotten a bad rap for having too many fees and being overly complicated. But this year they made their move. According to preliminary data from Limra, annuity revenue grew 22% in the second quarter of 2022 to a record $77.5 billion. It’s the most money investors have poured into the assets since Limra tracked sales, beating the previous record by $9 billion during the Great Recession in 2008. Much of this sales boom has been driven by concerns about market performance, rising interest rates and fears of an imminent recession. In the first half of the year, both stocks and bonds posted their worst performance in decades, hitting investors with balanced portfolios of both assets. “People reevaluate their portfolios, look at their financial plans and ask themselves, ‘Am I on the right track or wrong?'” said Corey Walther, President of Allianz Life Financial Services. Some of them bought annuities to protect their money, while others take cash they had on the sidelines and use it to grow but still be protected. “You can go into a fixed rate deferred [annuity,] They get a guaranteed return and don’t have to worry about their capital fluctuating like it would with a bond or a bond fund,” said Todd Giesing, Limra’s head of fixed income products. Fixed Annuities So what exactly is an annuity? Simply put, they’re tax-advantaged retirement accounts created by an insurance company — like a 401(k) or some individual retirement accounts, you don’t have to pay taxes on the assets until you pull them out, and when you do, they are be treated as income. They generally offer investors capital protection, stable growth potential and solid income. Annuities generally fall into one of two categories, fixed or variable. Fixed-income annuities are the most popular right now — sales were up 47% year over year in the first quarter of 2022 and 45% annually in the second — and they’re also among the simplest: a fixed-income annuity guarantees the buyer a fixed return for a set period of time — how when buying a CD, but the returns are usually higher. “They’re the easiest to understand because if you take a 5-year annuity that pays 4%, you know exactly what you’re going to get over those five years,” said Brian Stivers, founder and CEO of Stivers Financial Services in Knoxville, Tenn. For comparison, the top interest rate on a 5-year CD is currently just over 2%, according to Bankrate.Income can be taken immediately or deferred, and in many cases the investment can pass to a beneficiary when the Investor dies before annuity expires Typically, the longer an annuity is deferred, the higher the payout For example, the Midland National Life Oak Advantage three-year annuity has a fixed interest rate of 4.05% The same product with a 5- Annual contract pays a rate of 4.60% Investors can also purchase fixed indexed annuities which have returns linked to the stock market These generally have higher returns than a fixed product but are a They also have an income cap and charge a fee if you have to resign during the buyback period, typically five to seven years. Still, these products protect against losses – the Lincoln National Life FlexAdvantage 5 annuity protects 100% of the investment but has capped S&P 500 returns at 9.5%. Floating annuities Floating annuities, on the other hand, do not offer the same level of capital protection as fixed ones. Instead of having a guaranteed and specific rate of return, they can pay more because they are based on an underlying basket of sub-accounts chosen by the annuity owner. These sub-accounts are basically the same as mutual funds but do not have the same level of transparency as they cannot be easily searched or tracked by retail investors. Fees can be much higher than fixed annuities as there is more administrative work involved. And if the sub-accounts decrease in value, the value of the annuity also decreases, which means that the risk is much greater. “It’s like mutual funds,” Stivers said. “If you cash out in a falling market, you will lose.” The advantage of variable annuities is that they can span a variety of drivers who have different conditions, e.g. B. Lifetime earnings or other characteristic. However, these increase the overall costs. When should you buy an annuity? Of course, there are a few things investors should consider before buying an annuity. First, they need to understand the product they are buying as annuities are still fraught with complexity. They can also come with high fees or commissions that affect returns. Working with a financial planner and a trustee – or one who is obliged to act in the best interests of the investor – can help you find the right product. They are also generally aimed at older investors, as many face a penalty for withdrawing money before the redemption deadline or before the buyer turns 59. That’s at least some of the revenue growth — each year as baby boomers age, there are more and more people entering or nearing retirement who are looking for the kind of protection-plus-income that pensions offer. “If you’re in your 20s and 30s, even in your mid-40s, you’re willing to risk a little bit more because if you retire at 65, you’re still 15 to 20 years or more away. ‘ said Mark Williams, CEO of Brokers International. Attribution is also important. In a balanced portfolio, investors generally want some money that’s safe, in cash, and something that’s spread across bonds and stocks. “Annuities are generally allocated to your safe money,” Williams said. That means no more than half of your portfolio should be made up of bonds, and the amount should probably be less.
https://www.cnbc.com/2022/08/14/annuities-that-protect-from-stock-market-losses-are-surging-this-year.html Pensions, which protect against stock market losses, are rising sharply this year
