Across the U.S., many people are concerned about high interest rates in the current economy. The Federal Reserve began hiking rates in March of 2022, targeting an increase of greater than 5% in the years to follow. In late 2023, mortgage rates rose to over 7%, a level not seen for decades.

In this economic climate, annuities have gained popularity among some investors as a potential means of stabilizing income. News outlets reported that annuity sales reached a record $310.6 billion in 2022, a 17% increase since the previous high set during the Great Recession in 2008. This article will explore why annuities have become more attractive to some investors and the general benefits they may offer.

What Is an Annuity, and Why Are Investors Interested?

An annuity is a tax-deferred insurance product that provides regular payments during retirement. As the policyholder, you pay premiums either as a lump sum or in installments during an accumulation period, after which you can receive periodic payments—monthly, quarterly, or annually.

With the stock market experiencing volatility in 2022, many investors became concerned about their portfolios and retirement savings. At the same time, record-high inflation led the Federal Reserve to raise interest rates, which some feared might lead to a recession. For those seeking predictable income, annuities have become a viable option to consider.

The Benefits of Annuities

There are significant advantages to acquiring an annuity, regardless of where you are in your retirement journey. Here are some potential reasons why annuities may appeal to certain investors:

Income Consistency

An annuity provides a set income stream, offering a degree of predictability that other investments might not. Unlike equities, where returns may fluctuate, annuities deliver fixed payments based on the terms of the contract.

Predictable Payments

Ty Young, CEO of Ty J. Young Wealth Management, a firm known for expertise in annuities, emphasizes the value that annuities can bring to retirement planning by offering consistent payments. Annuities can offer a straightforward payment structure for those interested in avoiding the complexities of portfolio rebalancing or monitoring dividend changes.

Tax Deferral

For individuals with deferred annuities, contributions can grow tax-free until withdrawal. This tax deferral allows the invested amount to potentially grow faster than in a taxable account, depending on the rate of return.

Flexibility in Contribution Limits

Annuities may be beneficial for those who have already maxed out their employer-sponsored retirement accounts, such as a 401(k) or IRA. Deferred annuities do not impose annual contribution limits, which can be appealing to those who want to supplement their retirement savings.

Customization Options

Annuities come with options for customization, which may include features like:

• Predictable minimum income
• Disability income
• Death benefit policies
• Spousal survivorship clauses
• Cost of living adjustments
• Long-term care support

These options allow annuity holders to tailor their policies to suit specific needs, offering more flexibility compared to some other retirement vehicles.

Protection from Unauthorized Access

An annuity represents a contract with the issuing insurer. In cases of incapacitation, the structured nature of annuity payments can offer some protection against unauthorized access. However, it is essential to review each contract’s specific terms and conditions to understand the protections provided.

Annuities as Part of a Broader Financial Strategy

Annuities are highly flexible products that may align with various retirement strategies. For some, they offer the peace of mind that comes from having a structured income source. However, it’s important to remember that annuities are not suitable for everyone, and individuals should carefully assess their financial situation, goals, and risk tolerance.

Published by: Nelly Chavez