The FIDx Five: Rising Rates and Instability Lead to an Increase in Annuity Sales

Retirement, Annuity, & Fintech Insights 

In this week's edition of The FIDx Five, we dive into rising interest rates, spending "rules", medical expenses, millennials wanting to retire early, and have fun looking at the most trusted brands.

Rising Rates and Instability Lead to an Increase in Annuity Sales
Annuities had their best quarter ever between April and June, with $77.5 billion of sales to consumers. The volume of fixed-rate annuities jumped 79% in the same period. This comes as the S&P 500 continues to slide through the year, down 24% through September 30 and as the Fed also raised interest rates by another 75 basis points last week. Market instability and an increase in rates often leads consumers to “safe money” alternatives like fixed annuities. In a newer trend, short-term products of two or three years are outselling longer-duration products of five or more. Experts in the space expect sales of fixed-index and fixed-rate annuities to remain strong while sales of variable annuities experience a slight decline. (Aaron Smith, LifeAnnuitySpecialist.com, September 26^th, 2022, Distributors Share Peek Into Third-Quarter Annuity Sales, Trends, Link)

4% Withdraws Work, If You Cut Them in Half
The 4% rule comes up a lot, and for good reason. First coined by William Bengen in1994, it’s been cited as the standard safe withdrawal method by just about everyone in the industry at one point or another. But just recently, a pair of finance professors from the University of Arizona re-ran Bengen’s study using more realistic life expectancy scenarios and more comprehensive data. The result? 1.9%. You read that right. Under 2%. In real dollar terms, a $1M 401(k) would allow for inflation-adjusted withdrawals of $19,000. The authors aren’t suggesting a 1.9% rule for all. Like all things related to financial planning, how much a retiree chooses to take per year depends on the risk they’re comfortable taking. (Mark Hulbert, MarketWatch.com, October 1^st, 2022, Forget the 4% retirement spending rule. How do you feel about 1.9%?, Link)

Yup, Medical Expenses Are Rough
When planning for retirement, savers tend to underestimate two critical factors: how long they’ll live, and how much they’ll spend on medical expenses. Of course, these two go hand in hand. Live longer and you’ll incur more medical costs. A new report by the Center for Retirement Research at Boston College found that 12% of the median retiree’s total retirement income was spent on medical-related bills. As a portion of Social Security, the cost was closer 25% of their benefits. Using Fidelity’s Retiree Health Care Cost Estimate, a couple entering retirement at age 65 can plan on spending $315,000 on health care costs. (Trina Paul, CNBC.com Sept 30^th, 2022, Medical costs can eat up a sizeable portion of your retirement savings — here’s how much you should expect to spend, Link)

Ok, Millennial
Surprise! Millennials expect to get something for nothing! Alright, that’s not fair – especially if you’re reading this and you’re a millennial. Unlike their parents, many millennials don’t plan to work into their mid-60s, instead aspiring to stop working for financial reasons by 50. This movement, identified by many as FIRE (Financial Independence, Retire Early), is easier said than done. It’s not that it’s impossible, but a study by Willis Towers Watson showed that 36% of millennials (born between 1981 – 1996) are saving less than 5%, 26% had taken a loan from their 401k, and 25% had already taken a withdraw from their 401(k). None of this equates to an early retirement. Like any other group that wants to retire early, having multiple income streams in retirement is key. The max – as of 2022 – that can be contributed to a 401(k) is $20,500. That won’t enable most anyone to retire at 50. Instead, you’ll need passive income from holdings like real estate, investment accounts, or other sources. (Lisa Rabasca Roepe, NYTimes.com, Sept 24, 2022, Millennials Want to Retire at 50. How to Afford It Is Another Matter, Link)

Wait, Gen Z Prefers Kit Kat to TikTok?!
It’s always interesting to see which brands are the most trusted, admired and loved by different groups of people. Morning Consult recently tracked which brands are resonating most for Gen Z – a cohort whose oldest members are now in their mid-20s. The results may come as a surprise. For starters, Gen Z is more difficult to please than the generations that came before them, with an average brand favorability rating of 27% compared to 33% for all adults and 36% of millennials. Technology brands rule the roost, while the food and beverage industry makes up nearly half of the brands represented. As said in the headline, Kit Kat comes in number 9 while Tik Tok doesn’t crack the Top 40. The top five are YouTube, Google, Netflix, Amazon, and M&Ms. But don’t feel badly for Tik Tok, Gen Z has much greater affection for the app than all other adults in the US do.  (MorningConsult.com, Gen Z’s Favorite Brands, Link)

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