Gaurenteed Fixed Rate Annuities

Annuities

Despite historically low interest rates, fixed annuity sales are hitting record setting levels as the demand for transfer of risk guarantees continue to grow.

Sales of single-premium immediate annuities and fixed-index Annuities hit historic heights in 2013, according to recent numbers released by the industry data group, LIMRA. Even fixed-rate annuities (multi-year guarantee annuities, or MYGAs), that typically offer a slightly higher yield than CDs, are seeing a growing popularity as well.

The question for most market addicted investors is "How can this be?" With the 10-year Treasury at less than 3%, locking in these historically low-rate levels makes no sense for growth driven CNBC addicted watchers. These increased fixed-annuity sales certainly isn't due to better sales practices within the annuity industry.

Boomer crazy train

It's common knowledge that our population is getting older and is quickly shifting from portfolio growth goals to guaranteed income and lifestyle type goals. People that are already retired along with the rest of us with retirement in our sights are driving this growing fixed-annuity sales movement and "longevity risk free" income demands. Recent U.S. census projections reveal a tidal wave of "guarantees" buyers. One number that jumped off the page was the projection of people that are 65 or older will grow from 43 million to 92 million by 2060. That is the definition of a trend and these demographic realities can't be ignored by anyone, any company, or any politician for that matter.

Both Washington and the annuity industry are what I call "boomer crazy" because they both know that this demographic along with senior citizens are driving the train. That is a fact. Regardless of current interest rates, people will always need guaranteed income streams that they can never outlive. When a person needs more income right now to maintain or enhance their lifestyle, they aren't going to subscribe to interest rate driven newsletter or try to time rates. When a person is thirsty, they drink. This is a simple correlation that applies to ever growing annuity sales that has no end to this trend in sight.

Are we turning Japanese?

As we all know, Japan went decades with low interest rates, and there is a valid argument that our country may be emulating this type of stagnate rate period. The current easing strategy being implemented by the Fed has no past-tick data to indicate what happens when you print and buy back money simultaneously. Anyone who says they know are just throwing prediction darts. The reality is that rates could stay at this range for a while, and I think a lot of annuity buyers are taking this possibility into account.

The search for the interest rate crystal ball

Many so called experts think they actually have a crystal ball, but we all know that all they have is a neat sphere of glass. It's an obvious conclusion that if rates were higher, annuity pricing and payouts would be better. There's no good answer to trying to time rates, and the only prudent thought would be laddering or splitting annuity strategies to hopefully take advantage of any positive rate movement.

As an example of this rate timing challenge, if you waited 3 years to buy an immediate annuity in anticipation for rates to rise, you need to take into account the 3 years of income that you didn't collect against the higher payout you would receive if rates moved north. What's that break even point? The bottom line is that there is no perfect answer and it's a decision based on each person's specific situation.

What do you want your money to do?

Forget about annuities or any other type of investment, What do you want the money to do ? From that truthful answer, I can tell you if an annuity might be able to contractually solve your stated goal. The only catch is that if the answer is “market growth,” then I will emphatically point out that annuities aren't growth products and they need to stay in the non-annuity market. Even though the majority of annuities sold (variable and indexed) are pitched under the misguided dream of market growth, the contractual limitations of those policies are real.

By the way, if your answer is growth and income at the same time, then I politely remind you that annuity common sense should prevail and there is no contractual way to pull that off.

Many people are still looking over their shoulder in fear of another market drop. Those market loss scars are permanent with most American's, and the tradeoff of contractual guarantees in lieu of upside opportunity seems to be winning over investors to the fixed-annuity story. Current interest rates might be flashing on financial television network screens, but the ever growing sales of fixed annuities proves that not many people are actually watching or even care.

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