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Is an Annuity the Silver Bullet You Need to Recession-Proof Your Portfolio? 


LIMRA announced that annuity sales have increased 22% to $77.5 billion in the second quarter. This marks the highest quarterly sales ever recorded since the not-for-profit trade association began tracking data in 2014. Let’s break down why this surge is happening and whether you should consider buying an annuity too.

A financial advisor could help you find additional sources of income for retirement.

Why Annuity Sales Are at an All-Time High

LIMRA’s U.S. Individual Annuity Sales Survey shows that annuity sales jumped 22% to $77.5 billion in the second quarter, which is nearly $9 billion above the previous record set during the fourth quarter in 2008’s Great Recession.

“Continued equity market declines and rising interest rates drove investors to purchase record-level fixed-rate deferred annuities in the second quarter,” said Todd Giesing, assistant vice president for LIMRA Annuity Research, in a press release.

LIMRA’s research shows that fixed-rate deferred annuity manufacturers offer on average “interest rates more than four times that of a bank CD.” And this has made these products valuable for investors who are seeking protection and growth.

Additionally, total-fixed rate deferred annuity sales reached $28.2 billion in the second quarter, which is 76% higher than second quarter sales in 2021. And this makes it the best quarter on record for fixed-rate deferred annuities.

Overall, fixed-rate deferred annuities reached $44.1 billion in the first six months of 2022, which is a 44% jump when compared with the same period in 2021.

What Is an Annuity?

SmartAsset: Annuity Sales Reach All-Time High. Should You Buy One?

An annuity is an insurance contract that you can buy from a financial institution for a specific amount of money in exchange for a lump sum or periodic payments.

Depending on which type of annuity you want to buy, you can receive payments immediately or wait until a later date. There are two main types of annuities: fixed and variable.

Fixed annuities. With these annuities, you can choose periodic payments. The insurance company assisting you will make calculations of the payments based on age of the account owner, the duration of the payments, how much money is in the account and other factors. This will allow you to set up payments for a number of years or the rest of the account owner’s life.

Variable annuities. Variable annuities offer a wide range of investments and one of the perks involves tax-deferrals. Tax-deferrals mean you won’t owe federal income taxes with the money you earn with a variable annuity until you decide to withdraw, receive income payments to yourself or a beneficiary. This also allows you to move your money between investment options without paying taxes.

Is This the Right Time for You to Buy Annuities?

When interest rates go up, annuity rates also tend to go up because insurance companies invest in fixed income securities like bonds. However, when interest rates go down, this also means that annuity sales will go down and annuitized payments will be smaller.

In 2022, the Federal Reserve made a second consecutive interest hike of 0.75 basis points (three-quarters of a percentage point), which is the highest level since December 2018 and the fourth rate hike of the year.

Generally, annuities are considered safe investments that offer long-term growth and income. Many contract holders consider them to be a form of insurance that protects against the risk of outliving their retirement savings.

Because rates are climbing, this may be a good opportunity for workers near retirement and early retirees to boost their income with higher payments. This trend will likely continue as long as the Federal Reserve raises interest rates to fight inflation.

One note to consider: Because annuities grow tax-deferred, you will not have to pay taxes until you withdraw money or get payments. So if you bought your annuity with pre-tax funds, your withdrawals and payments will get taxed as income.

Bottom Line

SmartAsset: Annuity Sales Reach All-Time High. Should You Buy One?

Annuities can offer investors long-term growth and income. But investors will also have to pay taxes on withdrawals and payments. With interest rates going up, annuities have become more attractive, offering higher payments. But you should also note that when rates go back down, your payments will also be smaller. As with any retirement income decision, make sure to walk through all the benefits and risks with a qualified financial expert before you buy an annuity.

Retirement Tips

  • financial advisor could help you create a financial plan for your retirement needs and goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s free 401(k) calculator can help you estimate how much your retirement savings can grow over time.

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