Annuity Assets Surge Amid Stock Market Growth

Stellar stock market performance has fostered a surge in the demand for index and variable annuities in recent years, driving demand for all types of annuities. Read on to learn the extent to which a growing number of investors are leveraging these products to optimize their investment portfolios.

Annuity assets have experienced a significant surge the past few years, partially due to stellar stock market performance and mounting interest in index and variable annuities. Investors have been gravitating to these products, because they can offer a valuable mix of upside potential and downside protection, thereby positioning a portfolio for success in both bull and bear markets.

Below, we discuss the connection between the stock market and the surge in annuity assets and report relevant statistics. We also highlight some other factors driving the increased demand for annuity products. 

Strong Stock Market Performance

The S&P 500, a stock market index that tracks the performance of 500 leading companies in the U.S., has performed incredibly well in recent years. As of October 31, 2024, the S&P 500’s 1-year return was a whopping 36.1%, and its 5-year annualized return was 13.4%, both of which far exceed the long-term annual average of roughly 10.5%.

For stock investors, this has translated into significant wealth accumulation and more confidence regarding retirement preparedness. However, the gains have come with notable risk, and as we close out the last few months of 2024, the financial exposure feels very high. Rising geopolitical tensions, an increasingly polarized political environment and mounting uncertainty regarding the health of the U.S. economy indicate a spike in stock market volatility is likely. 

The only way to protect against the volatility is to implement some sort of equity hedge. Unfortunately, doing so on your own entails buying and selling complex, hard-to-understand instruments known as derivatives. A much simpler approach, one that has been growing increasingly popular with conservative investors, is to invest in annuities.

Growth of Annuity Assets

According to LIMRA, U.S. annuity sales exceeded $331 billion for the first nine months of 2024, a year-over-year increase of 23%. This marks the 16^th consecutive quarter of growth for the U.S. market (10 of which reflect a double-digit rate of growth).

Index and variable annuities sales, driven largely by consumers interested in participating in strong stock market performance (in a measured way), constitute about 70% of the total, while fixed annuities sales, driven largely by the other factors discussed below, represent about 30% of the total.

Other Factors Driving the Growth in Annuity Assets

Strong stock market performance is not the only factor driving the demand for annuities. The factors described below are having an even larger impact on the market. Collectively, they are fostering a fundamental shift in how people plan for retirement and manage their wealth.

• Aging Population: Baby boomers, a massive cohort of individuals born between 1946 and 1964, are entering retirement in record numbers. This is driving significant demand for retirement solutions that produce stable income streams and mitigate longevity risk. For those that do not want the stress of managing a retirement portfolio, annuities are the ticket.
• Elevated Interest Rates: The Federal Reserve cut the federal funds rate by 0.50% in September 2024 and is poised to implement additional rate cuts (if economic conditions warrant such action). Nevertheless, the federal funds rate is still sitting at a range of 4.75% to 5.00%, which is very close to the highest level reached in over two decades.
• This has created a very attractive environment for annuity investors, as higher rates have translated to more robust payouts. This, along with the customizable nature of annuities, makes them a very attractive alternative to bonds and other fixed-income investments.
• Highly Tailored Products: In recent years, the annuity industry has focused on better serving consumers and offering more flexible, customizable solutions. The most innovative providers are leveraging advanced analytics and artificial intelligence to formulate dynamic risk assessment models, predict life expectancies, optimize product offerings and create personalized product recommendations. All this bodes well for consumers, who stand to benefit from lower costs, higher crediting rates and significantly better retirement outcomes.
• Regulatory Changes: A growing number of retirement plan sponsors are expanding their 401(k) and 403(b) investment options to include annuities. This trend, which stems from the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, reflects employers’ response to workers’ call for broader access to lifetime income solutions.

Investments in annuities have surged in recent years, and a lot of the growth can be attributed to strong stock market performance. However, there are other factors bolstering demand – most notably, an aging population, elevated interest rates, increasingly customizable products and retiree-oriented regulatory changes.

Collectively, these factors have prompted a fundamental shift in how people plan for retirement and manage their wealth. The shift has been intensified by the fact that financial advisors are increasingly recommending annuities as part of holistic portfolio strategies, emphasizing their role in mitigating risk and generating retirement income.

If you are interested in adding annuities to your investment portfolio, make sure you understand their key attributes. At a high level, there are three distinct types of annuities, fixed, index and variable, all of which offer investors the benefit of tax-deferred growth.

Editor Norah Layne contributed to this article.