As record numbers of Americans reach age 65, retirees are turning to fixed index annuities for guaranteed income, principal protection and moderate growth, offering a safer alternative to bonds and stocks in today’s volatile market.
This year marks a significant retirement milestone for Americans: Peak 65.
Peak 65 refers to the record number of Americans reaching age 65. That means retirement is either at hand or right around the corner.
According to a 2024 white paper from the Retirement Income Institute at the Alliance for Lifetime Income, more than 4.1 million Americans will turn 65 each year through 2027. That’s more than 11,200 every day.
By 2030, all baby boomers will have reached age 65.
This milestone will reshape the demographic landscape in some form. Meanwhile, the financial tools retirees rely on are being reevaluated.
Dependable Income and Protection
Retirement planning has always involved balancing risk and stability. However, capital preservation is especially critical in today’s environment, characterized by stock and bond market volatility coupled with inflation.
Enter fixed index annuities.
Traditionally, retirees used bonds to reduce the volatility of equities and generate income. Bonds, along with certificates of deposit (CDs), historically offered low-risk, fixed returns that retirees could depend upon.
But that may be changing.
Even with rising interest rates, CDs and bonds may fail to outrun inflation.
For an extra layer of protection, more retirees are turning to FIAs for a mix of security, growth potential and guaranteed income.
Flight to Safety
The surge in retirements means more demand for predictable, pension-like income, especially as fewer Americans can rely on traditional pensions to cover basic living costs and ensure financial stability in their later years.
Recent industry data confirms that interest in annuities, particularly fixed annuities, is accelerating.
According to a November 2024 analysis from S&P Global Market Intelligence, the insurance industry logged $300.67 billion in individual and group annuity considerations in the first half of 2024, up from $241.07 billion in the first half of 2023.
That $59.6 billion jump marks the largest increase in direct annuity premiums in the last 20 years, wrote S&P analysts Hailey Ross and Jason Woleben.
This shift is driven largely by retirees’ desire for safety and guaranteed income, especially in an uncertain economic environment.
FIAs are benefiting from this trend, according to S&P, as aging Americans are growing increasingly concerned about the economy,
What’s fueling the demand:
- The retirement uptick means more demand for reliable income to replace traditional pensions.
- Higher interest rates mean better annuity crediting terms.
- Market volatility results in a greater desire for principal protection.
Advantages of FIAs
A fixed index annuity is a type of insurance contract that gives the buyer principal protection. Taxes are deferred, and you won’t lose your original deposit even if the stock market declines.
Unlike fixed annuities, which offer a set interest rate, fixed index annuities tie their interest rate to an underlying index, such as the S&P 500, potentially offering higher returns.
If you buy a fixed index annuity, you’ll have more growth potential than a fixed annuity, along with less risk but lower return potential than a variable annuity.
John White, financial advisor at Advisor Share Wealth Management in Carrollton, Georgia, said FIAs offer a unique balance of principal protection, moderate growth potential and guaranteed income. “That makes them an attractive option for conservative retirement planning,” he added.
“Unlike stocks or variable annuities, FIAs shield your savings from market downturns while allowing partial participation in market gains, though returns are capped,” White said.
That makes them less risky than market-linked investments but less lucrative during strong bull markets.
“Compared to fixed annuities or bonds, FIAs provide higher growth potential due to their index-linked structure while maintaining guaranteed principal protection,” White noted.
This mix of protection and growth potential means FIAs are increasingly seen as a way to generate retirement income without the full risk of market-based investments.
“Given these benefits, fixed annuities are a great alternative to bond funds, which can decline in value when interest rates increase,” said Tom Buckingham, chief growth officer at Nassau Financial Group in Hartford, Connecticut.
Recreating Pension-Like Income With Annuities
As so many boomers reach age 65, there’s a mass shift away from wealth accumulation and toward wealth protection.
It’s not surprising, then, that FIAs, with their built-in downside protection and guaranteed minimum return, are becoming more popular.
In his January 2024 white paper, Jason Fichtner, executive director of the Retirement Income Institute at the Alliance for Lifetime Income, noted that Social Security benefits represent about 30% of the income for those over age 65.52.
Social Security operates similarly to an annuity; recipients can count on regular payments to help pay the bills and maintain their lifestyle.
That dependability is important for retirees. Annuities can serve a similar purpose as part of a retirement plan. That’s especially true for younger boomers, the crop that is currently retiring or will be in the next few years.
While many older boomers could rely on pensions for part of their retirement income, that’s not true for the Peak 65 boomers, born mostly between 1955 and 1964.
“Based on the number of active participants in a retirement plan, the number of participants in defined-benefit is dwarfed by those in defined-contribution plans,” Fichtner wrote.
According to the white paper, in 1975, defined-benefit plans represented 33% of all retirement plans. As of 2021, defined-benefit plans accounted for only 6%.
“Today, in order to recreate the income protection from a pension, some financial planners recommend around 20%-25% of your retirement assets be in an annuity, not including Social Security benefits,” Fichtner wrote.
A Reliable Income Option With Caveats
Like any investment, FIAs have pros and cons.
White noted that annuity owners are trading flexibility for stability.
“They often impose surrender charges for early withdrawals, making them less liquid than stocks or [exchange-traded funds],” he said.
In addition, he said, while FIAs excel at providing predictable lifetime income through riders, they lack the upside of dividend-paying investments and require a long-term commitment.
“Overall, FIAs are best suited for retirees or near retirees seeking a secure income stream and protection from market volatility, complementing more aggressive investments in a diversified portfolio,” White said.
Editor Norah Layne contributed to this article.
