Yesterday I blogged about how immediate annuities compare to bonds when creating retirement income. Bonds cannot match the security and guarantees offered by immediate annuities. When interest rates are high, you typically see a large increase in sales of fixed annuities such as immediate annuities. Rates aren’t what you would consider high right now, but immediate annuities had a record sales year in 2013. According to “Low Rates Haven’t Stopped Annuities Sales,” Zachary Tracer and Margaret Collins of Bloomberg Business Week said that immediate annuities are seeing a sales surge despite low interest rates. With record sales of $8.3 billion last year, immediate annuity sales have tripled since the late 1990’s.
If you have any concern about running out of money in retirement or are risk averse, immediate annuities are a good product to have in your portfolio. After a one time purchase from an insurance company, you will receive guaranteed payments for the rest of your life. Since most immediate annuities are fixed, your payments depend on the prevailing interest rate when you buy your annuity. Even though rates are not high now, returns are still better than they are with U.S. Treasuries. Part of the reason that immediate annuity sales are so high is the fact that more people are reaching retirement age each year. Between 2012 and 2060, the number of people age 65 and up will more than double. Demand for immediate annuities is increasing because so many more Americans are reaching retirement age. The average age of an immediate annuity purchaser is 73.
But the demand isn’t only increasing because of all of the people reaching retirement age. After 2009, people hid from the stock market and put their money into places that they deemed safe. Many of those older people missed out on the past few years of gains in the markets. Now they are searching for safety and security and immediate annuities meet those needs. Variable annuities still hold the most annuity market share, but that may be declining as some insurance companies scale back on these products. The government is working hard to make it easier for Americans to use annuities in their 401k plans as pensions become a thing of the past. They realize the importance of securing an income that you cannot outlive from your retirement savings. Most retirees worry about giving up control of their hard earned saving by purchasing an immediate annuity. But using a portion of those savings to guarantee lifetime income guarantees security and piece of mind, regardless of what is happening in the economic markets.
Written by Rachel Summit