It's all about balance: How annuities can factor into savers’ portfolios

Figuring out the equities equation

More than one-third of baby boomers carry too large a share of equities in their financial portfolios, according to a recent study by Fidelity Workplace Investing. At the same time, 38% of boomers participating in a recent GoBankingRates survey said they are not confident that they’ll have enough money saved for retirement.

These two worrisome trends often go hand in hand. Concerned that they may not have saved enough money for retirement, boomers may ramp up the amount of money they have invested in stocks as they head toward or deeper into retirement. But while their goal is to make up for lost time by potentially earning higher returns in the market, this strategy carries a high level of risk, since the window for making up any losses incurred by stock dips and downturns gets shorter and shorter as investors move further into their golden years.

“There’s no doubt that many baby boomers’ retirement portfolios hold too much risk from equities,” says Carla Urbaszewski, assistant vice president of Global Atlantic’s Advanced Markets team. “In some cases, investors are investing more heavily in stocks to catch “There’s no doubt that many baby boomers’ retirement portfolios hold too much risk from equities.”up for not saving enough. In others, they may be working with an investment mix that they set on ‘cruise control’ years ago and never adjusted as they got older.”

Conventional wisdom recommends that investors consider moving their investments away from risky assets such as stocks into safer products such as bonds as they get older. But nearly two-thirds of U.S. adults aged 65 and older own equity through individual stocks, mutual funds, or retirement savings accounts, according to an April 2023 survey by Gallup. That compares to about half of Americans in the same age cohort that held stocks before the Great Recession of 2008. The 65-and-older age group was the only age segment that saw stock ownership rates rise during this period.

Some baby boomer investors are reluctant to dial back on stocks because of past successes and the fear they will miss out on any big upward swings in the future, Urbaszewski adds. “They are hoping to reap the benefits of a market uptick without weighing the risk they face if the opposite occurs, and stock values go way down. If that happens, they won’t have as much time to recover as when they were younger.”

For these aging investors, annuities could provide an important tool for maintaining more balanced financial portfolios, Urbaszewski suggests.

“Often as savers age, the emphasis in many portfolios may need to shift away from stocks and more toward more conservative products such as fixed income products, and annuities,” she says. “Where saver needs to land on that spectrum depends on their life circumstances—factors such as their age, risk tolerances, asset base, retirement goals, and income needs.”

A skilled financial professional can help clients assess all these factors to determine what their ideal portfolio balance should look like—and the most appropriate path for ensuring they don’t outlive their money.

To reduce risks posed by market losses, inflation, and other unforeseen events, Urbaszewski suggests that clients consider diversifying their holdings. “Savers should never put all your eggs in one basket. Diversification is often the key, whether it’s the mix of asset classes in a portfolio or the various sector allocations within each class. Financial professionals can help clients develop a smart game plan so that all their strategies work together to achieve the desired goal.”

Annuities can play a key role in this strategy, she adds, such as providing a steady income stream regardless of how the market performs or other reasons.

New wave of interest

An often overlooked and misunderstood element in many portfolios, annuities have tallied strong sales growth during the past two years as many savers have rediscovered the unique balance of asset protection and growth potential these products can offer, particularly during volatile markets. Annuity sales also have benefitted from the recent climb in U.S. interest rates, which are currently the highest they have been since 2001.

"...as savers age, the emphasis in many portfolios may need to shift away from stocks and more toward more conservative products such as fixed income products..."

Savers typically have used annuities in one of two ways: to accumulate growth on a tax-deferred basis or to turn the money they’ve saved into a guaranteed income stream. In addition, annuities can be used as an estate or legacy planning vehicle to pass along savings to another family member or favored organization.

In the first three quarters of 2023, total sales of annuities increased 21% to $270.6 billion, according to preliminary results from LIMRA, a worldwide trade association providing research, development, and consulting services to the financial services industry. That growth comes on the heels of a record 2022, when sales surged to $310.6 billion, 17% higher than the previous record set in 2008.

“LIMRA expects 2023 sales will surpass the record sales set in 2022,” said Todd Giesing, assistant vice president of LIMRA Annuity Research, in a news release about this year’s continued strong performance. He added that current growth is taking place across a broad range of annuity types, with registered index-linked annuities (RILAs) up 11%, fixed index annuities (FIAs) up 25%, fixed rate deferred annuities (FRDs) up 43%, single premium immediate annuities (SPIAs) up 63% and deferred income annuities (DIAs) up 104% for the first nine months of 2023.

“While the average FRD annuity crediting rates continue to outperform CD rates, the gap has diminished,” Giesling said. “Investors—feeling more confident in the economy—are shifting to RILAs and FIAs, seeking the potential for greater returns.” That said, with a significant amount in FRD contracts coming out of surrender this year, LIMRA expects a portion of those assets to be reinvested in FRD products, “driving total FRD sales to another record year.”

Giesling added that traditional variable annuity (VA) sales are running 20% below the results during the first three quarters of 2022.

“Variable annuities have definitely fallen out of favor over the past few years,” Urbaszewski notes. “The fees tend to be higher, and the terms are often confusing for the average investor.”

Since the rates of return for variable annuities are tied to professionally managed investment options made up of products such as stocks, bonds, and money market instruments, they also carry some measure of risk depending upon how they’re allocated.

Range of choices

At the same time, other types of annuities such as DIAs and RILAs have become much more mainstream. Some companies have begun offering annuities as part of employee 401K plans, for example, recognizing the role they can play in delivering guaranteed lifetime income for retirement—and some measure of tax-deferred growth potential before that time comes.

“Annuities have a lot of benefits for savers who are getting close to retirement,” Urbaszewski says. “And there’s a wide range of products, so a saver really can tailor the annuity selections to fit their own needs and risk tolerance. They all offer the ability for funds to grow tax deferred until the point that funds begin to be withdrawn, which is an advantage over many other types of products.”

The range of choices starts with fixed annuities, which deliver a guaranteed rate of interest over a specified period. This option is particularly attractive for savers seeking the security of guaranteed interest with no risk. Single-premium immediate annuities offer an immediate income stream; deferred income annuities offer a payoff starting later.

For those willing to take on some risk, fixed index and registered index-linked annuities are other types of annuity contracts that provide savers with the opportunity for growth while still offering downside protection. The interest earned by FIAs is linked to the performance of an index such as the S&P 500, but the principal is still protected from losses. RILAs also offer the potential for greater returns but with a higher risk profile than FIAs. Some of these annuities also offer an income benefit.

“Today’s annuities may have a spot in many savers portfolios for wealth accumulation, income protection, or both,” Urbaszewski says. “As American lifespans grow longer, annuities can provide an element peace of mind that your money will be there if you need it.”