What You Should Know about Annuity Rates and Trends (+Tips)

Posted by Bill Bruce on May 25, 2023 11:00:00 AM

man evaluating annuity rates

For many Americans, annuities are an excellent option for turning large amounts of cash into steady, ongoing income or for creating steady income during their retirement years. However, a lot of people might not be completely familiar with the specifics of these financial products—such as annuity rates, trends in the annuity market, or the difference between various annuity types (such as a variable vs. fixed index annuity).

To help you better understand annuities, here are a few annuity statistics and trends to know and a quick explanation of fixed index annuities and variable-rate annuities.

3 Annuity Statistics and Trends to Know

Before purchasing an annuity, it’s important to know a few basic things about them. If you wanted to know whether annuities are a good way to protect your money or prepare for the future, the answer is: it depends—and you should talk to a financial advisor or a certified financial planner (CFP) for details since interest rates are subject to change.

1. Size of the Annuity Market

According to MoneyGeek, “Annuity sales in the U.S. in 2022 totaled $310.6 billion.” Considering that the U.S. population was about 334,730,297 as of May 9, 2023 (Source: United States Census, U.S. and World Population Clock), this means that, in 2022 alone, roughly $927.91 of annuities were purchased for every U.S. citizen.

Why were so many annuities purchased in 2022? Part of the reason may have to do with recovery after the pandemic—annuity sales dipped from $242 billion in 2019 to $219 billion in 2020 to coincide with the outbreak, as shown in the MoneyGeek article. The current high numbers of sales may be partly due to a resurgence in interest as the economy recovers and more Americans find themselves with extra income to purchase annuities.

Also, the pandemic may have helped demonstrate the value of having extra income streams to help cope with difficult times. Estimates vary, but sources such as The Motley Fool state that as much as “64.4% of Americans live paycheck to paycheck.” When tough times hit, having a reliable source of income can mean the difference between being able to pay the bills and falling deep into debt covering basic living expenses.

2. Average Annuity Rates

The sheer variety of annuity products on the market makes it difficult to create an accurate “average annuity rate” estimate. For example, are we talking about fixed-rate annuities or variable-rate annuities? Deferred annuities or immediate annuities? To create an estimate for “average” annuity rates, it’s important to know what kind of annuity you’re talking about.

Different annuity providers may have a variety of terms that strongly impact the actual rate of return you can see for an annuity product. For example, let’s compare a fixed annuity to a guaranteed interest rate with a 5% annually compounded rate of return and a variable annuity with an average rate of return of 5%.

If you put $5,000 into the fixed annuity, after one year, the value of the annuity would grow to $5,250. After ten years, the annuity would be worth about $8,144.47.

For the variable-rate annuity, the money would be put into an investment with no guaranteed minimum or maximum. If the average rate of return was 5%, but the variance was up to 10% higher or lower (meaning any one year could see a 15% return or lose 5% of value), then that annuity could be worth anywhere from $4,750 to $5,750 after one year. After ten years, that variable-rate annuity could be worth between $2,993.68 and $20,227.78.

Some annuity providers might offer higher rates for annuities with longer deferments. It’s not uncommon to see annuity rates around 4%-5% for deferred fixed annuities—though 5% and up would be on the higher end for fixed annuities.

Finally, annuity markets, like any other market, may fluctuate from year to year. Consult with your financial advisor or a CFP to get more accurate, up-to-date information about the specific type of annuity you’re interested in and any market value adjustment you need to consider.

3. Fixed Interest Rate vs. Variable Rate Annuities

How many annuities are sold as fixed-rate vs. variable-rate? If the sales numbers reported by MoneyGeek are any indication, it seems that the majority of Americans prefer the stability offered by fixed-rate annuities to the uncertain opportunities provided by variable-rate annuities.

Here are the 2022 numbers from the MoneyGeek report:

  • Fixed Annuities. Fixed annuities accounted for $208.1 billion of the annuity products sold in 2022. The breakdown of fixed annuity sales by type is:
    • Structured Settlements: $5.4 billion
    • Fixed Immediate Annuities: $9.1 billion
    • Deferred Income Annuities: $2.1 billion
    • Indexed Annuities: $79.4 billion
    • Fixed-Rate Deferred: $112.1 billion
  • Variable Annuities. Variable annuities accounted for roughly $102.6 billion in annuity sales in 2022. The breakdown of variable annuity sales is:
    • Registered Index-Linked Annuities: $49.9 billion
    • Traditional Variable Annuities: $61.7 billion

fixed annuity trends for retirement

Choosing the Best Annuity Product for Your Needs

So, which is better for your needs, a fixed annuity rate with a guaranteed return? An immediate annuity that puts liquid assets in a secure place to provide a reliable, long-term income stream? A variable annuity that can soar to provide high returns (at the risk of potential loss)? A deferred annuity that puts off the start of your payments so your money can grow before you start collecting?

The answer of which type of annuity is best for you will depend on your current financial situation and goals.

Consider Fixed-Rate Annuities If You’re:

  • Relying on that income for your future financial plans.
  • Risk-averse and don’t want to gamble on a potentially lower effective annuity rate because of market fluctuations.
  • Are looking for a steady and reliable revenue stream that you can count on.

Consider Variable-Rate Annuities If You’re:

  • Comfortable with a potential loss or lack of growth for a chance at higher earnings.
  • Confident that the stock market will see strong growth while your annuity is accumulating.
  • Are looking to maximize your potential annuity rate gains with money you can afford to do without.

Note: some variable annuity products offer a minimum annuity rate (such as 0% to 1% growth) to provide some security against an underperforming investment portfolio. This helps to mitigate some of the risks of variable annuities by keeping the annuity from actually shrinking in value. Consult with your financial advisor or a certified financial planner when shopping annuities of any kind—especially variable-rate annuities.

Consider Immediate Annuities If You:

  • Have recently come into a large lump sum of money—such as from a lottery jackpot win or a major lawsuit/settlement—and want to ensure that the money can’t all be spent at once.
  • Are looking to set up a steady income stream to help you budget for ongoing monthly/annual costs—such as utility bills or paid subscriptions.
  • Are concerned that a long delay would keep you from being able to collect on your annuity due to death or illness. For example, many retirees above the age of 65 choose to set up an immediate annuity rather than a deferred annuity.

Consider a Deferred Annuity If You:

  • Don’t have an immediate need for the money you plan to use for the annuity.
  • Want to give your money more time to grow before you start collecting on it.
  • Are planning ahead for retirement and want to make the most of your retirement savings. Many deferred annuities are timed to start paying out when the annuitant (i.e., the person the annuity is paying) enters retirement age or on their planned early retirement date.
  • Wish to have some flexibility on the payment schedule. A deferred annuity sometimes offers the ability to collect payments before the “annuitization phase” (i.e., the scheduled start of payments) begins. Check with the annuity provider what the costs/penalties are for early withdrawals.

Once you’ve consulted with your financial advisor or CFP, it’s time to start shopping around with different annuity providers.

When looking at annuity products, annuity contracts, or insurance contracts, consider the following:

  • How long has the annuity provider offered annuity products? While having decades of experience is no guarantee of reliability, it can be a positive indicator.
  • Does the annuity company offer clear and concise explanations of the terms of the annuity contract? When purchasing any financial product, it’s important to go into the agreement with a clear understanding of what you’re getting. Finding an annuity company who is willing to answer your questions and explain anything you’re uncertain about is a must.
  • Who is the financial [professional helping you through the annuity purchasing process? Are they an independent agent or are they beholden to a particular insurance company? Finding an experienced and independent agent to work with is important for getting an unbiased product recommendation based on your needs.
  • What financial certifications does the agent you’re working with have? To sell annuities in your state, agents may need a variety of certifications and licenses. For example, because variable annuities are considered securities, they’re subject to Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) rules. So, it’s important to look for an agent in good standing with these organizations.

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Note: This blog article does not constitute financial advice. Please consult with your financial planner or advisor before purchasing any major financial product, including insurance products.

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Topics: Annuities