Annuities have previously gotten a bad rap for offering too many fees and being too complicated. But this year, they hit their stride. Annuity sales rose 22% to a record $77.5 billion in the second quarter of 2022, according to preliminary data from Limra. It’s the most money investors have poured into the asset since Limra has been tracking sales, surpassing the previous record set during the Great Recession in 2008 by $9 billion. Much of this selling boom has been driven by anxiety about market performance, rising interest rates and fear of an upcoming recession. In the first half of the year, both stocks and bonds posted their worst performances in decades, putting investors who had portfolios balanced with both assets under pressure. “People are reevaluating their portfolios, looking at their financial plans and asking ‘am I on track or off track?'” said Corey Walther, president of Allianz Life Financial Services. Some of them have bought annuities to protect their money, while others are taking cash they had on the sidelines and using it in a way that will grow but still be protected. “They can go into a deferred fixed rate [annuity,] get a guaranteed rate of return and not worry about your principal fluctuating like you would in a bond or bond fund,” said Todd Giesing, head of annuity products at Limra. Fixed Annuities So what is an annuity, exactly? they are tax-deferred retirement accounts set up 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 withdraw them, and when you do, they are They are treated as income. They generally offer principal protection, stable growth potential, and solid income to investors. 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-on-year in the first quarter of 2022, and 45% year-on-year in the second, and they’re also among the simplest. A fixed annuity guarantees the buyer a fixed rate of return over a period of e fixed time, such as buying a CD, but the returns are generally higher. “They’re the easiest form to understand because if you take a 5-year annuity that pays 4%, you know exactly what you’re going to get for those five years,” said Brian Stivers, founder and CEO of Stivers Financial Services in Knoxville, Tennessee. By comparison, the highest rates for a 5-year CD are currently just over 2%, according to Bankrate. Income can be withdrawn immediately or deferred, and in many cases the investment can pass to a beneficiary if the investor dies before the end of the annuity. Typically, the longer an annuity is put into, the higher the payout. For example, the Midland National Life Oak Advantage 3-year annuity has a fixed rate of 4.05%. The same product with a 5-year contract pays a rate of 4.60%. Investors can also buy fixed indexed annuities, which have income tied to the stock market. These will generally have higher returns than a fixed product, but also come with an income cap and will charge a fee if you need to withdraw during the term, usually five to seven years. Still, these products protect against losses: The Lincoln National Life FlexAdvantage 5 Annuity protects 100% of the principal investment, but has capped S&P 500 returns at 9.5%. Variable annuities Variable annuities, on the other hand, do not offer the same level of principal protection as fixed annuities. Rather than having a specific, guaranteed return, they can yield 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 they don’t have the same transparency because they can’t be easily searched and tracked by retail investors. Fees can be much higher than fixed annuities because there is more management involved. And, if the sub-accounts fall in value, so will the value of the annuity, meaning there’s a lot more risk. “It’s like being in mutual funds,” Stivers said. “If you take money out in a down market, you will lose.” The advantage of variable annuities is that they can include a variety of users who have different stipulations, such as lifetime income or another feature. However, this will increase the overall cost. When to buy an annuity Of course, there are a few things investors should watch out for before buying an annuity. The first is that they understand the product they are buying, as annuities are still full of complexity. They may also include high fees or commissions that affect returns. Working with a financial planner and fiduciary, or one who has a duty to act in the investor’s best interest above their own, can help ensure you find the right product. They are also generally for older investors, as many come with a penalty for withdrawing money before the end of the vesting period or before the buyer has turned 59 ½. That’s behind at least part of the increase in sales: As the baby boomers age, more and more people are retired or nearing retirement each year and looking for the kind of protection plus income they offer the annuities. “If you’re in your twenties and thirties, even in your mid-40s, you’re willing to take a little more risk because if you retire at 65, you still have 15 to 20 years or more left,” said Mark Williams. , CEO of Brokers International. Allocation is also important. In a balanced portfolio, investors generally want to have safe money, cash and some that is spread between bonds and stocks. “Annuities, in general, are for your safe money,” Williams said. This means that no more than half of your portfolio should be in annuities, and that amount should probably be less.
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