With potentially volatile markets in 2025, there will be a rising demand for reliable retirement income solutions. Understanding options and working with financial advisors can mitigate risks.
As we enter 2025, several factors might contribute to market volatility, which in turn, could potentially affect annuity solutions—contracts that offer a steady stream of income— for retirees. Insurance companies can play a significant role in helping seniors navigate this sometimes complex situation.
For retirees, it is essential to understand which solution is the most appropriate for their unique situation and consider which factors might contribute to a volatile market next year.
Factors That Could Contribute to Volatile Markets in 2025
The new Trump administration will be in place in January, meaning it might enact new fiscal, regulatory and trade policies. These changes could all impact the market.
Another factor that could make it difficult for retirees to navigate annuity and retirement solutions is the Federal Reserve’s approach to rates next year. The Fed started cutting interest rates in September 2024 and expects to cut them further in 2025. The decision, however, will hinge on several economic conditions, such as whether inflation will continue its downward trend and whether the labor market will remain strong.
Tailwinds for Retirees Going Into 2025
The country is undergoing a silver wave, as more than 4 million Americans will be 65 each year through 2027. At the same time, only 27% of baby boomers are confident their savings will last, so exploring options such as annuities and understanding their differences is key, especially in potentially volatile markets.
Against this backdrop, several economic trends including inflation, interest rates and market volatility, could contribute to retirees’ financial challenges. High interest rates and high prices have already all taken an enormous toll on savings these past few years and have derailed retirement plans for many.
Economic Trends and Lower Interest Rates Environment Impacting Annuities
Now, the shift to a lower interest rate environment could also impact annuities. Indeed, while lower interest rates benefit the population at large, they can also affect annuity prices and lifetime income.
Insurance companies use interest rates to determine how much income they can generate from your premium over time. When these are high, insurers can generate more income and offer more payout. On the other hand, in a low-rate environment, the payout is lower for the exact same cost.
In addition to the rising cost of living, retirees must also contend with increasingly expensive healthcare expenses and consider longevity risks.
That’s why consulting with an advisor to better navigate annuity solutions in uncertain times is essential. These solutions can provide stability, guaranteed income and peace of mind for retirees.
Role of Insurance Companies in Ensuring Financial Security
Insurance companies are key in supporting retirees in these uncertain times and can offer several well-tailored solutions.
Several types of annuities might be beneficial in volatile markets, as they intend to provide protection and guaranteed income in any economy.
Fixed annuities guarantee a fixed interest rate over a set period and can offer predictable growth and security, making it a comfortable option for more risk-averse retirees. However, these also lack liquidity and inflation protection.
Fixed index annuities (FIAs), on the other hand, can be a beneficial choice in an uncertain environment and during volatile markets. As the Securities and Exchange Commission (SEC) explains, an index annuity generally promises to provide returns linked to the performance of a market index.
FIAs with volatility control features aim to provide stable returns in choppy markets by managing risk through dynamic index allocation strategies, meaning the annuity alters its investment strategy depending on current market conditions and the level of market fluctuations. By frequently adjusting its asset distribution, it strives to enhance returns while reducing the impact of unpredictable market shifts.
Annuity Solutions in Volatile Markets
Navigating different annuity solutions can be very complex. Choosing one during a volatile market environment can add another layer of difficulty. Retirees should also consider several factors, such as their risk appetite, future income needs and long-term goals, when weighing their annuity options.
Whatever the situation, it’s always a smart move to consult and seek guidance from trusted insurance providers and financial advisors, who can help you pick the best solution.
Editor Norah Layne contributed to this article.