Are annuities catching on? The numbers seem to say so.
Sales of these insurance products, primarily designed to convert assets into a guaranteed income stream, have increased for 15 consecutive quarters and reached a record $215 billion in the first six months of 2024, up 19 percent from the same period last year, according to LIMRA, a trade association that conducts research for insurance and financial services companies.
Many in those industries tout annuities as a potential pillar of retirement security, particularly for the youngest boomers and oldest Gen Xers, who entered the workforce as pensions went into decline and will rely more on savings and Social Security as they reach retirement age.
“With the decline of traditional pensions and the future value of Social Security in question, protected lifetime income from products like annuities can help relieve a retiree’s fear of outliving their savings,” says Brandon Buckingham, vice president of the Advanced Planning Group at Prudential Retirement Strategies.
Still, there are plenty of skeptics, and their concerns “have some merit,” says Spencer Look, associate director of retirement studies with the Morningstar Center for Retirement and Policy Studies.
“I do think there is a big reputational issue with annuities,” Look says. The term covers a wide range of income and investment products, he notes, and some can be complicated, costly and, because they generate commissions for sellers, subject to aggressive sales tactics.
Here are some of the chief reasons many people remain skittish about annuities, and what you need to know if you’re considering purchasing one.
The problem: Annuities are confusing
Typically, when you purchase an annuity, you agree to pay a lump sum of money (upfront or in a series of incremental payments) in exchange for guaranteed payments later. But it’s not always that simple.
There are several different types of annuities, from single premium immediate annuities to fixed-index annuities and beyond. When payments start, how much they are and how long they last can vary widely, depending on contract terms. Annuities also come with a range of riders and fees that can raise costs and add to the confusion.
“There is almost choice overload if you are starting by yourself,” Look says.
In a 2023 financial literacy survey by the American College of Financial Services, adults ages 50 to 75 knew the least about annuities among 12 topics related to retirement security.
What to consider: Some annuities are less complicated than others. With a single premium immediate annuity, for example, you pay a lump sum upfront and immediately begin receiving monthly payments that will last the rest of your life. “It’s just like a pension,” Look says.
Fixed-rate annuities, sometimes called multiyear guaranteed annuities, are also relatively straightforward, he says. These function much like a certificate of deposit (CD), offering a fixed rate of interest for a set period, typically three to 10 years.
In-plan annuities, offered through some “defined contribution” retirement plans such as 401(k)s, could be “another way of taking out that complexity” if they are more widely adopted, Look says. With this option, savings in your workplace plan are converted into an annuity that provides guaranteed payments.
According to LIMRA research, only about 1 in 10 workplace retirement plans offer an annuity option, but more than 4 in 10 plan sponsors say they intend to do so or are actively considering it. The momentum is due in part to the SECURE Act, a 2019 federal law that relaxed regulations governing the purchase of annuities through individual retirement accounts (IRAs) and 401(k) plans.
Whatever annuity you are considering, read the fine print in the contract and, if possible, consult a trusted financial adviser to help you understand the terms.
