New Annuity Shapes and Sizes: The Top 100 Picks

The Evolution of Annuities: Innovative Options for Retirement Planning

Annuities are becoming increasingly creative in their ability to address a wide range of retirement concerns. Whether it’s the fear of losing money in the stock market, the worry of outliving your savings, or the desire to leave a legacy for your heirs, there's now an annuity tailored to meet these specific needs.

For instance, some annuities offer a double-digit positive return if the S&P 500 declines for the year. Others guarantee lifelong income that doubles if you end up in a nursing home. There are even options that ensure your heirs receive the original investment amount, even if you've drawn down the account to nearly nothing. These innovations reflect a growing trend in the annuity market, where products are designed to provide peace of mind and financial security.

High Rates and Strong Guarantees

The current landscape of annuities is also marked by high interest rates, which have led to favorable rates and guarantees. Fixed annuities, which function similarly to bank certificates of deposit (CDs), are offering five-year rates over 6%, significantly higher than the typical 4% for CDs. For those seeking guaranteed lifetime income, the returns have nearly doubled compared to what was available five years ago.

A 60-year-old man investing $200,000 could potentially receive $32,168 annually for life with certain annuities. This level of income stability has attracted many investors, leading to a surge in annuity sales. In the past year alone, sales increased by 13% to a record $434.1 billion, nearly doubling over four years after 18 years of stagnant growth. Although early this year saw a slight dip in sales, recent market volatility and economic uncertainty have driven another spike, with first-quarter sales matching last year’s record of $106 billion.

The Role of Annuities in Retirement Planning

Annuities serve as insurance-sold investment products that can help protect assets during the accumulation phase and provide a reliable income stream during retirement. They are also being used more frequently to protect assets intended for heirs.

However, annuities are not a one-size-fits-all solution. Like other forms of insurance, they come with costs, whether through annual fees, reduced liquidity, or limited upside potential in the stock market. Additionally, they are long-term investments, with tax-deferred growth and penalties for withdrawals before age 59½. Many annuities also include surrender periods, typically between five and 10 years, during which penalties apply for early withdrawals.

Choosing the Right Annuity

Selecting the right annuity requires careful planning and consideration. With around 2,000 different contracts available, the variety can be overwhelming. Each contract offers unique features, such as different stock indexes, protection levels, death benefits, income styles, and upside designs. For example, registered indexed-linked annuities (RILAs) allow investors to participate in stock market growth while limiting losses.

Recent developments in RILAs have made them more attractive. Some now offer no cap on upside returns, while others provide a buffer against losses. For example, Jackson National Life, Lincoln Financial, and MassMutual offer RILAs with a 10% loss buffer and 115% participation in the S&P 500’s performance. Equitable Financial Life’s SCS Income ADV automatically triggers a 11.25% return if the S&P 500 is up, flat, or down within a 10% buffer.

Despite these benefits, RILAs come with caveats. Insurers may adjust caps at the end of the term, which could affect returns. To mitigate this risk, six-year RILAs with longer surrender periods have become more popular. Investors should also look for RILAs with no caps, as these indicate no future restrictions.

Guaranteed Income Options

New guaranteed income designs have emerged as insurers compete for retirement investors. Global Atlantic’s Income 150+ SE offers a 20% bump in guaranteed income, while Allianz’s Income Flex Benefit rider allows for level income payments with untapped increases available later. These options provide flexibility and stability, making them appealing for retirees looking for predictable income.

However, it's important to note that the annuity best suited for accumulating assets may not be ideal for income needs. While RILAs offer potential for significant upside, fixed-indexed annuities typically provide higher minimum returns for income guarantees. As Mike Downing from Athene notes, claims of both amazing returns and income often don’t hold up under scrutiny.

Legacy Planning with Annuities

For those focused on legacy planning, variable annuities are often the best choice due to their lack of downside protection and potential for higher asset growth. Variable annuities function like IRAs, allowing investors to choose from a menu of mutual fund-like investments. While they don’t offer downside protections, they can provide greater flexibility for heirs.

Some insurers have introduced additional features to enhance legacy benefits. Lincoln Financial’s estate-lock feature ensures that heirs receive the full initial investment, even if the account value is nearly depleted. Transamerica’s Annual Step-Up death benefit locks in high values, providing heirs with a high-water mark of the annuity’s value even if it has declined.

Final Considerations

When considering an annuity, it's essential to understand all-in costs and how they are applied. Fees are typically a percentage of the account value, so they increase as the investment grows. However, some insurers offer optimal fee structures, such as New York Life’s Premier Variable Annuity, which applies the mortality and expense fee based on the original investment, reducing the fee as the account value increases.

It’s also crucial to work with an advisor who has access to a broad range of annuities from various insurance companies. A qualified professional can help identify the annuity that best fits your specific needs and goals.