Tax-deferred annuity? The world of investing has gotten more complex as the years have gone on. The flood of new products and investing strategies continues to evolve with time. Whether age-based target funds, long/short mutual funds, market-weighted ETFs, structured products, or equity-indexed annuities, there’s been no shortage of creativity around the financial industry.
One of the investments that continue to garner a lot of attention is the tax-deferred annuity. In looking at recent sales statistics as they coincide with market volatility and recession fears, it’s no wonder annuity sales are hitting all-time highs.
Total annuity sales in 2018 increased 14 percent to $232.1 billion, with Q4 2018 having the highest total annuity sales in a quarter since Q1 2009.
In addition, total fixed annuities were up 47 percent from Q4 2018 at $37.4 billion. Fixed annuity sales rose 25 percent from 2018 to $132 billion, which is an all-time high. Also, indexed annuity sales set an all-time quarterly record at $19.5 billion – a 40 percent increase from Q4 2018.
Let’s look at 5 reasons why the tax-deferred annuity is so popular and could be a partial solution to your retirement planning. Other advisors may put these in a different order, but the numbers don’t lie – millions of investors are motivated by some, if not all, of the reasons mentioned here.
1. Political uncertainty in the U.S. and the world.
It feels like there’s never been such division in Washington, D.C., and across our nation. The political rhetoric is downright scary. Impeachment hearings, record-level national debt, and the specter of socialism is frightening many investors. It isn’t much better in Europe with anxiety over Brexit and negative interest rates. Many European banks continue to sit in the danger zone.
2. Guarantees found in no other investment vehicle.
Just for fun, ask your current financial advisor if they can provide a written guaranteed rate of return on the investments they manage for you. If they’re willing to do so and you’re not buying an annuity, your next phone call should be to the SEC or FINRA. Annuities are the only investments associated with the word “guarantee.” In an uncertain world, you can see why this is appealing to so many investors.
3. Tax-deferral.
A basic function of annuities is they can turn taxable money into tax-deferred savings with virtually no contribution limits. That means no pesky 1099s at the end of the year. With a variable annuity, any dividends, interest, or annual capital gains are not taxed and continue to grow within the account. Why pay taxes on your investment income when you don’t have to, especially if you’re in a high tax bracket?
4. Index-linked growth with optional fees.
The annuity industry has worked to solve the gripe that annuities are too expensive by creating a wide variety of equity-indexed annuities that offer optional riders at an additional cost. In addition, equity-indexed annuities often include surrender charges, and in exchange for some form of downside protection, returns may be limited by caps, participation rates, and spreads.
5. Added peace of mind.
Wouldn’t it be nice to know the outcome of your investments 10 or 12 years from now? Uncertainty often leads to anxiety. Anxiety can lead to health problems. For retirees, being confident they won’t have to go back to work is essential.
Annuities aren’t for everyone. Some feel they’re too complex. For others, the features and benefits mentioned above are more compelling than traditional investing. The annuity concept is intended to represent the “safe” portion of your retirement nest egg. It has specific guarantees associated with it that no other traditional investment can offer. In an uncertain world, annuities can offer the added peace of mind many investors are looking for.
(Source: Forbes)