If you are considering adding an annuity to your portfolio, now may be a good time to get in. Americans have flocked to annuities for guaranteed income over the past year, as interest rates rose and investors looked for safety amid the market turbulence and recession concerns. Total annuity sales increased 12% year-over-year to $88.6 billion in the second quarter, according to preliminary results from Limra , an insurance industry trade group. One of the popular products has been fixed-rate deferreds which — as the name implies — provide a fixed rate for a specific period of time. Sales of fixed-rate deferred annuities totaled $73.2 billion the first six months of 2023, a 64% increase from the previous six month period, per Limra. That's the highest sales figure for the product in a six-month period, the group said. "We think that the sales will continue to be strong this year. However, we've made the projection that for the second half of the year, we think the fixed-rate-deferred sales will start to come down a little bit," said Bryan Hodgens, Limra's head of distribution research and annuities research. One factor to consider is the path of the Federal Reserve's interest rate increases, which began in March 2022. The central bank hiked rates by a quarter percentage point in July, bringing the fed funds rate to a target range of 5.25% to 5.5%. It indicated future rate hike decisions would be data-driven and on a "meeting-by-meeting" basis. "Every investor is wondering, 'are we done hiking rates yet,' but ultimately, at some point, the Fed will stop hiking rates," said Doug Ornstein, senior integrated solutions manager for TIAA Wealth Management. "So that opportunity to get a more competitive rate on a fixed annuity is not an indefinite window." Multiyear guaranteed annuities Traditional fixed annuities typically guarantee the rate for a portion of the contract, while a multiyear guaranteed annuity, or MYGA, has a rate of return that is guaranteed over the duration of the contract. They work similar to certificates of deposit. At the end of the term, investors can roll it over to a new annuity or take the money. Be aware that though CDs offered through banks are ultimately supported by the Federal Deposit Insurance Corporation, annuities are backed by the claims-paying ability of the insurer writing the contract. In the event of an insurer's insolvency, state guaranty associations are the last line of defense. MYGAs may offer higher interest rates than CDs, said David Blanchett, head of retirement research for PGIM DC Solutions. Earnings also accumulate tax deferred and aren't levied until the investor begins taking payments. "You can stretch that out for a really long time if you do end up annuitizing," he said. "It doesn't really matter when interest rates are 1% or 2% … but now that you can get 5% on cash or a CD or a MYGA, the ability to defer taxation is incredibly valuable." Here are some of the top-yielding fixed annuity products — both three-year terms and five-year terms —from insurers with an AM Best credit rating of A- or higher, according to research by Cannex . The rates are based on a $100,000 premium. Cannex used Connecticut in its database search to find a representation of what is available. Insurance products, including annuities, are state regulated, so what's available can differ from one state to another. A 'personal pension' Annuities aren't necessarily a fit for all situations or all investors. For those looking for a short- or immediate-term investment, consider bonds or CDs, said TIAA's Ornstein. "You really want to think of an annuity more as part of a retirement plan or a plan to provide income to yourself or someone else in the future for a long period of time," he said. "It's really a personal pension." He said investors should have a slice of their nest egg in a fixed annuity, but no more than 40% of their total assets. "When you're investing for a long-term goal, you want it to be diversified, usually, to hedge against all different kinds of risks," Ornstein said. "An income plan is no different. You want to have multiple sources of income in retirement, to hedge against different risks in retirement." TIAA Institute studies show that having about two-thirds of income from a source that is guaranteed for life has the most successful outcomes, he added. That includes Social Security and any pensions. When buying a fixed annuity, investors need to figure out the term that works best for them, said Limra's Hodgens. "The consumer should be matching their risk tolerance up to their overall portfolio, and then the term that they want to invest this money for," he said. "Do they need it for anything in the next three years, other than the growth that they're going to earn on this investment?" Investors should also be aware of what could happen with the annuity if they die. Some offer death benefits, but what your beneficiary will receive can vary from one contract to the next. Assessing costs Another factor to consider are the costs involved. "For MYGAs, usually it's just like a CD," Blanchett said. "If you buy a CD, it has a cost but it reduces the effective yield. So the insurer makes 5%, they only offer 4% because they keep the 1% differential." Do your research to see what the costs and various rates are, as well as the ratings of the insurance companies offering the annuities. "The fixed annuity cost is probably going to be a little bit higher than the fixed income mutual fund, simply because they're otherwise the same thing except the annuity has this insurance benefit with it," Ornstein said. "So you're transferring your risk of outliving your money to the annuity company or to the insurance company." You will also likely be charged if you cash in your annuity before the surrender date. The surrender cost is usually a percentage of the product's total value. Then there is the opportunity cost, which means investors could miss out on higher stock market returns for the lower, guaranteed income, Ornstein said. Your stream of payments also may not keep up with inflation. Yet annuities can also provide a tremendous amount of peace of mind, he added. "We see that with a lot of retirees when they turn on the income from their annuities," he said. "They can see that old-fashioned feeling of 'I have a pension. I'm going to be OK and I can live comfortably without working.'"
