Rising interest rates, high inflation, and a declining stock market can push many investors to question their investment selection, especially those looking at retirement in a few short years. As such, the Secure Retirement Institute reported total U.S. annuity sales are at their highest since 2008. Does it make sense to purchase annuities in times of volatility and uncertainty?
Annuities are not a financial plan but products to use inside a structured plan to minimize an identified risk. Furthermore, we look at annuities as part of or an instrument within your fixed income portfolio. The basic principle is that you pay a premium to an insurance company in exchange for future periodic payments. The payments may begin immediately or at a future date and can continue for a period that can be as long as your lifetime. Depending on the terms of the annuity, the insurance company may provide you with contractual guarantees based on the claims-paying ability of the issuing insurance company and prevailing market conditions.
Why do higher interest rates increase investors’ curiosity about annuities? Payouts are based on two key factors: life expectancy and interest rates. When insurance companies can get a higher yield on their bond portfolio, they generally provide higher benefits or extended guarantees on the policies for their current policyholders but also make them more attractive to prospective buyers. It is a win-win situation for both the insured and insurer. However, insurers do not have access to investments in the market that are different from what is readily available to all investors; therefore, investors need to ask, “What does this annuity do for my plan?”
Annuities are still investments, and with all investments, there are inherent risks. Too many times investors were sold on the idea that one product could successfully accomplish the dual objectives of guaranteed income with market-oriented growth. However, when using annuities for a single purpose, they can be effective, regardless of whether the need is for guaranteed income or the “safe” growth of money.
More often than not we end up repurposing an existing annuity to fulfill a current need. Annuities should be measured for their “risk transfer.” If an investor can transfer an identified risk for a fair return, then it is generally considered a good trade. Before you engage in any investment product, you need to know: the initial fees and ongoing fee structure; the increased costs for additional guarantees; your investment restrictions and if adding guarantees to your annuity product will reduce your investment options, and when and how to access your funds and any penalties associated with accessing funds.
Inflation can affect many investments, but you may be able to invest into a diversified portfolio of high-quality stocks from companies that can more easily pass on the higher costs to the consumers. While you are placing your trust in the stock market, you can generally manage your risk and minimize volatility by investing across numerous sectors and multiple companies within each sector.
If you have questions on how the investments or products in your portfolio work for your overarching financial plan, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
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This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
