There’s no doubt about it—annuities are hot right now: in March 2022, LIMRA reported record-high annuity sales, with total sales in the U.S. increasing 4% to $63.6 billion between Q1 2021 and Q1 2022, and fixed indexed annuity (FIA) sales up 14% over Q1 2022. Options like FIAs are an increasingly attractive retirement planning solution, offering principal protection and steady growth.
Nationwide’s Advisor Authority study found that 89% of advisors say they are likely to choose an annuity to protect against outliving their savings, however just over half (58%) of investors say the same. So, what is holding them back?
As we mark National Annuity Awareness Month (NAAM) this June amid rising interest rates, increased market volatility and heightened interest in annuities, now is the time to talk to your clients about incorporating annuities into their financial plans. Below are some common investor misconceptions and ways you can address them with your clients to solve the annuity puzzle together.
Myth 1: Annuities are too costly. As traditional pension plans become increasingly rare, options like 401(k)s have become more popular. However, it’s important for your clients to understand defined contribution plans are tied to the markets, making those investments vulnerable to market volatility, which could potentially devastate their retirement if it strikes at the wrong time. Annuities, on the other hand, function as an insurance product, and while some may have underlying investment options that are tied to the markets, they also offer guaranteed income and have features that offer a level of protection during market fluctuations.
It’s not surprising that the process of understanding the sometimes-complicated annuity fee structures may feel overwhelming to those less familiar with these types of solutions. That’s why it’s important to invest time helping your clients understand various annuity options and the fees associated with each one. But it’s just as important to underscore what they receive in return for these additional expenses—a level of downside protection and income guarantees that will help make their retirement more predictable.
Myth 2: Annuities are only for older, high and ultra-high-net-worth individuals. While it’s true that many people who own annuities tend to be more affluent and closer to retirement age, recent data indicates an appetite among more of the population. According to the Alliance for Lifetime Income, 62% of annuity owners have less than $500,000 in investable assets, and 46% are middle class, earning between $75,000 and $150,000 annually. In addition, interest in annuities among younger generations is growing, with more millennials choosing an annuity to protect against market risk year over year (85% in 2021 vs. 72% in 2020) according to Nationwide’s Advisor Authority study.
As you work with clients at all stages of the financial life cycle, note that a lengthier annuity accumulation phase means more time for investments to grow, leading to the potential of greater principal growth and higher payouts in retirement.
Myth 3: There is a right (or wrong) time to purchase an annuity. In any economy, and at all stages of the financial life cycle, annuities can provide protection and guaranteed income. This is an attractive proposition in today’s economic environment, but it may not have felt as urgent for some investors during the recent decade-long bull market. The bottom line is, annuities help clients prepare to navigate adversity in the future, which is impossible to predict. Given this unpredictability, having the opportunity to participate in a portion of equity market gains while having limits on market losses can be very appealing to investors today.
While there is no right or wrong time to buy an annuity, these solutions can be tailored to unique goals and circumstances. For example:
• High earners and the high net worth, who can easily max out qualified plans, may want to take advantage of the contributions afforded through an investment-only variable annuity (IOVA).
• A fixed indexed annuity (FIA), can help guarantee that investors will not lose any of their initial investment or credited earnings due to the performance of underlying indexes, offering more flexibility and choice to advisors and clients navigating today’s complex markets.