Annuities in a Poor Economy

• Posted By : Braden MacDonald
• annuities, fixed annuities

Are Annuities Popular during Economic Downturns?

Investors often turn to annuities during economic downturns. Uncertainty in the stock markets cause many people to see safer options. For a younger investor, it makes sense to stay in the market because they have the time to make up any losses, however folks nearing retirement may not have that luxury. These investors want the added security of principal protection within the annuity and are concerned that leaving their money in the market will result in further losses.

Life insurance companies are responding to the concerns of variable investments by developing a number of new annuity products over the past several years. These new products enhance the life insurance company’s reputation of safety during turbulent economic times. This is a very good reason for why annuities are popular. For example, indexed annuities provide the potential to participate in a portion of the markets upside growth after a correction, while still having a guarantee on the original investment. This is especially attractive to investors who fear losing out on the recovery, yet can not afford to lose any more of their saving. The fear of running out of money in retirement begins to out weigh the benefits of maximizing upside growth.

Maintaining a Balanced Portfolio:

There is an old adage with investing that says the percentage of "safe money" in your portfolio should equal your age. Meaning, when you are 30 years old, 30% of your assets should be protected with safe investments such as a money market or CD, and by the time you are 60 years old, that percentage should increase to 60%. Annuities are a great vehicle for that portion of your portfolio, with the key phase being "portion."

The amount of money you put into annuities should be limited to the funds in your portfolio that you absolutely do not want to risk losing. That number will vary from person to person, but you should not have all your assets tied up in annuities, just as you probably should not have all your money in bit-coin.

Should you wait for higher interest rates?

The interest rate environment following the covid-19 crash of 2020 hit all time lows. Does that mean you should wait for rates to rebound before considering an annuity? No, not necessarily. Interest rates for annuities are closely tied to the 10 year treasury yields, and those yields determine the rates of almost any "safe" investment vehicle available. Because annuities are longer term products, insurance companies are able to offer higher rates than almost anywhere else, so low interest rate environments can actually make annuities more desirable in comparison to other safe options.

CD’s are typically shorter term are considered such a safe investment they usually offer lower interest rates then traditional fixed annuities. An important thing to remember with both annuities and CD’s is that if an individual were to decide to cancel or surrender the contract prior to the maturity date both can be subject to penalties or surrender charges.

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