Despite low interest rates, sales of immediate annuities hit a record $8.3 billion last year, compared to averaging less than a third of that in the late 1990s, according to new data released by the industry group LIMRA.
Experts point to two main factors in the resurgence, the first being demographics. U.S. census projections show that the number of people aged 65 and older will more than double between 2012 and 2060, from 43 million to 92 million.
“Regardless of what’s going on in the economy, you just have a natural driver of demand, which is more people reaching retirement age, said Matthew Grove, a senior managing director at New York Life, noting that the average age of buyers of immediate annuities in 73.
Still, the economy has also played a role. In the wake of the financial crisis, may savers put their money in cash or ultra-safe but low-yield Treasuries, meaning they missed out on one of the longest-running bull markets.
“People climbed into bomb shelters” in 2009 and “hid there for four years,” said David Edwards, president of Heron Financial Group in New York. Now, with the realization that they are “no closer to their retirement goal,” some are moving towards the secure income that annuities provide, he added.
At the same time, though, variable annuities — which can offer greater potential for gains but also the risk of losses—had sales of $145 billion last year, marking a decline.
Yields on 10-year Treasuries have not increased enough for some financial advisors to feel comfortable putting their money in annuities. “You don’t want to put a client in something that’s illiquid, in an environment where you think rates are going to go up,” said David Keator of the advisory firm Keator Group in Lenox, Mass.
But policymakers are increasingly showing support for annuities because of concerns that with the increase in longevity and a shift from company pensions to 401(k)s, Americans are in danger of outliving their savings.
The Treasury Department has in fact proposed regulations to make it easier to fund annuities from 401(k) accounts and other retirement plans.