Why More Americans Are Buying Annuities for Retirement

Sales of annuities, a financial product that can provide a lifetime income stream in retirement, are smashing records as Americans look to lock in high interest rates.

Sales of one type of annuity in particular, fixed-rate deferred annuities, have more than tripled in the last two years, rising to $164.9 billion in 2023 up from just over $50 billion in both 2020 and 2021, according to trade association LIMRA.

With annuities, you pay a lump sum to an insurance company to receive monthly payments for life that begin on an agreed upon date, which Americans commonly align with their retirement. Annuities with deferment periods are popular for people in their 50s or 60s who want a product that will grow tax-deferred before they convert it to a steady income stream.

Fixed-rate deferred annuities are the "most basic product" out of the many different types of annuities because they grow at a guaranteed annual rate, says Chris Blunt, CEO of F&G, an annuity provider that is a subsidiary of Fidelity National Financial. His company has seen 46% growth in the space in the past year, thanks in part to more attractive rates.

In 2022, rates were in the arena of 2.5%, Blunt says. But last year, they soared and now sit around 4% to 5%.

Fixed-rate deferred annuities are behaving similarly to certificates of deposit (CDs), which also provide guaranteed returns at rates that typically move in tandem with the Federal Reserve’s rate decisions.

With inflation cooling and the Fed possibly gearing up for rate cuts in 2024, people are seizing on what could be the last chance to get a rate in the ballpark of 5%.

Unlike CDs, however, annuities are not insured by the Federal Deposit Insurance Corp. (FDIC), and there are typically higher fees as well as a 10% early withdrawal penalty for distributions before age 59 ½. These are clear tradeoffs, but in exchange, you can usually get a better rate with an annuity than a CD.

Annuity sales broke records in 2023

Bryan Hodgens, head of research at LIMRA, says the first jump in annuity sales occurred in late 2022 and early 2023 as interest rates were rising amid high inflation.

"When you had these pretty dramatic increases in interest rates, consumers could now get much higher rates on these fixed annuities," he says.

Rates have increased in large part because annuity companies invest your dollars in bonds and other securities, which are generating higher returns. Annuity companies were faster to react to the changes in market conditions and adjust their rates compared to banks offering similar products, according to Eric Henderson, president of Nationwide Annuity.

"As the Fed raised rates, banks tended to be slow to raise their CD rates where the insurance industry, the annuity industry moved more quickly, so I think that’s what really caused the surge at first," Henderson says.

He adds that this was around the time when recession fears were peaking, which meant there was high demand for safe places to stash money that offered returns without the risk of the stock market. Of course, a recession hasn't materialized and "you would have been better off actually investing in the market, but you didn't know that at the time," Henderson says.

Hodgens says the fourth quarter of 2023 marked a second big spike in annuity sales. Sales have boomed again more recently because the Fed is indicating that rate cuts are on the horizon, which is spurring people to buy while current annuity rates are still available.

Higher rates create opportunities for retirement savers

It’s not just fixed-rate deferred annuities that are hot, Hodgens says, noting that fixed indexed annuities and registered index-linked annuities (RILAs) are also selling at record levels. Like fixed-rate deferred annuities, these products are common tools for retirement planning and they're more attractive in a high-interest rate environment.

With fixed indexed annuities, you don't have a constant rate of return like with the fixed-rate variety. Instead, they're tied to indexes like the S&P 500, but your principal investment is guaranteed, meaning you can't lose any money. In exchange, the upside — or how much you can earn — is capped.

RILAs are almost exactly the same except instead of not being able to lose money, the insurance company commits to absorbing the first 5% or 10% of loss in the event the index declines in a year, Butler says. There’s still a cap on the upside, but it’s not as large.

Annuities aren’t the right retirement planning tool for everyone: Some have high fees, and alternative retirement savings options may offer greater flexibility or the potential for higher returns. But they can be appealing to people who want a lifetime income stream. One strategy is to combine annuities with Social Security so you can ensure a level of comfort — or at least income — in retirement.

While there's been plenty of talk around the pain for consumers that comes with high interest rates, annuities are a good example of how there's also been the emergence of some unique opportunities in fixed income to set yourself up for the future, Hodgens says.

"Most Americans loved their pension plan, it’s just most of us don't have a pension plan anymore," Blunt says. Annuities, though, can provide a similar peace of mind that you won't outlive your savings.

"That can be game-changing in an overall financial plan," he says. "It gives people more courage to be a little more aggressive on the rest of their savings."

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