Six-plus years into a rising stock market, many Americans
continue to crave financial certainty and shun risk, which helps to explain why
annuity sales have held up so well. It’s not just the stock-market backdrop
that makes solid annuity sales interesting — it’s also the low interest rates.
More investors are buying annuities even though they’re paying some of the
slimmest yields in decades. Normally, declining rates hold down sales of
interest-sensitive products, noted LIMRA, an insurance and annuity research
group, commenting on a 3% rise in annuity sales in 2014.
There are different types of annuities, which makes it hard
to generalize. Variable annuities that feature stock-market funds now account
for more than half of overall sales, while conservative fixed or
guaranteed-rate contracts pay steady, bondlike yields. Annuities in the latter
category have enjoyed rising sales over the past couple of years despite paying
yields of just 2% to 3% or so. Clearly, annuity buyers aren’t focused solely on
yields. Here are other factors that help explain the improved popularity of
annuities, including conservative products:
•All those Baby
Boomers have moved into prime annuity-buying ages.
Buyers typically get interested in annuities when they reach
their mid-50s or 60s, and nearly all Baby Boomers are now in this range. The
opportunities for insurance companies that sell annuities could continue for
decades, as millions of other adults, now entering their 40s and early 50s,
aren’t far behind. In 2011, 42.5 million Americans were 55 and up, but that
will rise to 64 million by 2025, LIMRA projects.
Nor is it just the graying trend per se that explains rising
annuity sales — there’s also a pronounced risk aversion among Americans
generally. Despite a resurgent stock market now trading again near record
heights, millions of Americans want nothing to do with it.
•Buyers might be
acclimatized to low interest rates.
If you think interest rates will rise, it’s smart to delay
buying a fixed-rate annuity so that you can lock in a higher yield later. But
after years of low interest rates, it’s not a certainty that rates will budge
by much anytime soon. The Federal Reserve plans to boost rates, of course, but
nobody expects the changes to be dramatic. Other interest rate-sensitive
investments, including bonds and bond mutual funds, also have remained popular
despite low yields.
Besides, the Fed’s influence is focused on short-term rates
such as those affecting money-market yields and credit card interest rates.
Annuity yields are more likely to reflect intermediate-term interest rates, as
these investments are backed by the bond portfolios held by insurance
companies, noted Andrew Murdoch, a senior vice president of AnnuityFYI, an
annuity comparison and research website. Still, Murdoch and others see a
potential uptick in annuity sales should interest rates start climbing.
•Many buyers may
underestimate the annuity benefits of Social Security.
Most Americans have access to an annuity already. It’s
called Social Security. Granted, the federal retirement program isn’t exactly
the same as annuity contracts sold by insurance companies, but a primary
feature — the ability to collect retirement income for as long as you live — is
similar. In fact, many analysts consider Social Security to be better than
commercial annuities. For starters, the federal government, not individual
companies, stands behind those payments. Despite chronic federal deficits,
Uncle Sam is still widely viewed as a stronger credit bet than any insurance
company.
Another advantage is that Social Security benefits rise over
time, thanks to cost-of-living adjustments that often aren’t available on
commercial annuities. Further, Social Security benefits rise by up to 8%
annually for younger seniors who delay taking them before age 70.
Because of the COLA features, Social Security could be
viewed as a type of inflation-protected government bond, said Michael Kitces, a
financial adviser and commentator in Reston, Va. He suggests that retirees
consider delaying the receipt of Social Security benefits upon reaching the
eligibility age of 62, even if it means tapping into other investment accounts.
This strategy, of younger retirees using savings to pay
current living expenses while waiting for their Social Security benefits to
increase, has been likened to buying an annuity from the Social Security
Administration. In a report, the Center for Retirement Research at Boston
College called it “generally the best deal in town, especially in today’s low
interest-rate environment.”
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