If you’re looking for a way to consistently generate income during your golden years then look no further than annuities. Annuities are popular financial tools that can provide you with a rare free lunch in retirement – guaranteed income. But, the attractiveness of this asset constantly fluctuates depending on the economy.
Over the past year, we’ve had a particularly turbulent economy with a handful of ups and downs. To help make sense of this all, I’ll be taking a detailed look at current annuity trends and even offer my genuine opinion on whether or not I think annuities are right for you.
What are Annuities?
As a quick crash course, an annuity is a financial product that can help give you consistent income. For this reason, people often use them to finance their retirement. These are the two types of annuities:
- Income annuities: Offer a set payout for life in return for a lump-sum investment. In other words, you give an insurance company a lump sum and they promise to pay you consistently for the rest of your life (in this sense, it’s very similar to Social Security).
- Deferred annuities: Allow you to accumulate tax-deferred savings while providing the option to create lifetime income in the future
Annuities are usually contracts between yourself and an insurance provider or other financial entity. As you might have guessed, nothing is ever simple when dealing with an insurance agency. There are a lot of stipulations and different types of annuities that you can sign up for. But, this article isn’t supposed to be an in-depth review of annuities (you can read that here). Instead, let’s talk about whether or not annuities are a good investment in 2024 and beyond.
Annuity Sales Hit All-Time High
According to the LIMRA US Individual Annuity Sales Survey, US annuity sales hit an all-time high in 2023. So, the short answer is yes, annuities are very popular right now. In total, annuity sales hit $385 billion in 2023, a 23% increase from 2022 (which was also a record year).
Annuity sales have been skyrocketing as aging Baby Boomers look to lock down consistent income during retirement. According to U.S. Census Bureau projections 10,000 baby boomers will turn 65 each day in 2024. The Census Bureau has even gone so far as to call this transition a “gray tsunami.” But, just because annuity sales are skyrocketing does not necessarily mean that you should buy one. This is because you may be able to achieve higher returns in other assets.
For example, the stock market returned over 20% in 2023. You’d think that this might incentive people to rush in and join the bull market. But, for people nearing retirement, the sentiment is actually quite the opposite. The stock market is notoriously cyclical. So, a surging stock market could mean that a crash is right around the corner. The last thing an aspiring retiree wants to do is invest a chunk of their net worth into the market, only for it to collapse 5%, 10%, or even 20% over the coming months. So, instead, retiring Baby Boomers have been looking to secure consistent income in the form of annuities.
But, if you’re not nearing retirement then you might actually prefer to invest your money in equities as you might enjoy a higher return over the long term.
Passage of The Secure Act in 2019
Annuities have also been growing in popularity thanks to the passage of The Secure Act in 2019. This legislation included more than two dozen provisions to expand access to retirement savings accounts for American workers. It essentially made it easier for employers to include annuities in workplace-sponsored retirement plans.
So, another reason that annuity sales have been skyrocketing is likely because they have become much more accessible through The Secure Act.
Annuity Outlook for 2024
So, annuity sales have been hitting record highs over the past year or so. But, what about in 2024 and beyond? Will annuities still be a good investment?
Since 2022, the Federal Reserve has been raising interest rates at the fastest clip in decades. At the end of 2021, the fed funds rate was close to 0%. Today, this same rate is between 5.25%-5.5%. This rate trickles over into financial products and can increase the attractiveness of certain assets. According to iCapital’s 2024 Market Outlook, annuities now offer more upside potential and guaranteed lifetime payments than they did previously – thanks to heightened interest rates. For example, many five-year fixed rate deferred annuities continue to offer guaranteed rates of around 5.0% annually. This is significantly higher than what you could get a few years ago.
So, fixed income financial products like annuities have become much more attractive over the past two years. But, the Federal Reserve is widely expected to start cutting interest rates in 2024, which will reduce the attractiveness of annuities over time. So, if you think this is a good option for you then you might want to buy one sooner rather than later to lock in a higher rate.
Are Annuities Right For You?
This depends on your age. But, if you’re nearing retirement age and are interested in securing guaranteed income at a rate close to 5% then you may want to consider annuities.
But, if you have a bit more time until you’re ready to retire (approximately 5-10 years or more) then your cash might be better off in a diversified mix of equities. On average, equities generally return 10% annually. But, in some years, they can return up to 20%. So, if you decide to buy an annuity then you will likely be missing out on higher returns that you could have generated in the stock market.
Annuities are great financial products for the right investor. But, that doesn’t mean that they make sense for everyone.
I hope that you’ve found this article valuable when it comes to determining the future outlook for annuities. If you’re interested in learning more then please subscribe below to get alerted of new articles as we write them.