Millennials want in on annuities

Make way, Baby Boomers, Millennials want in on your annuities.

The nation's youngest batch of retirement savers are more interested than any other age group in the investing strategy behind annuities, even though most of them have likely never heard the word "annuity," according to a survey just out from the Indexed Annuity Leadership Council.

When asked whether the concept of an annuity — described as contributing to an account monthly (usually until age 70.5) and receiving guaranteed payouts in retirement that aren't subject to stock market fluctuations — was attractive, Millennials had the largest portion, 52%, say they were somewhat or very interested in that type of product.

Which isn't surprising, given the Great Recession instilled a fear of the stock market in many young adults, says David Weliver, founder of personal finance site Money Under 30.

"A lot of younger Millennials had parents or grandparents who lost a third of their retirement savings at a critical time," he says. "That's created a real mistrust of investing in the market."​

The findings don't necessarily mean Millennials would follow through on buying an annuity. IALC found that just 2% of 18- to 34-year-olds expect to be able to rely on annuities in retirement, compared with 13% of 51- to 69-year-olds and 24% of those 70 years and older.

Sales of annuities are up

Fixed-index annuities, a type of annuity that benefits from market gains, have become more popular in recent years as investors wary of stocks sought more stable options. Sales of fixed-index annuities have jumped in the past two years and were up nearly 5% in the first quarter of 2015 compared with the year-ago quarter, according to analytics firm Wink, which surveyed 49 indexed annuity providers.

But annuities are still largely sold to older Americans taking a more conservative approach to retirement savings. The average age of the fixed-index annuity buyer in the first quarter was 62, according to Wink. Though that's down from an average age of 64 in first quarter 2014.

That number could trend younger if annuities catch on with risk-averse Millennials, says Jim Poolman, executive director of IALC. There are different types of annuities, but the general concept is that they act as a contract between you and an insurance company whereby the company guarantees payment to you throughout retirement. Some plans let you pay in a lump sum and start receiving money back immediately, while others defer payments and let you pay in over time. Annuities typically give a return of between 1% and 3%. For the year, the S&P 500 Index has posted modest gains of around 2%.

Poolman says annuities suffer from a lot of misconceptions. "People don't necessarily understand the product," he says. "You are not subject to market risk ... they are providing you with a minimum guarantee."

Annuities typically lock you into a contract for eight to 10 years, during which surrender charges are imposed if you end the contract early, Poolman says. The rate of return can also be hindered by caps and fees insurance companies apply to index gains.

A warning to consider

Overall, though, annuities are extremely complex and all have different terms, fees and payment options, which is why personal finance experts advise to read the fine print. And some caution against annuities for a young investor who can take advantage of time and a riskier investing strategy.

Millennials in particular, who have extreme debt and little ability to save, should keep assets liquid, says John Spooner, a managing director of wealth management at Morgan Stanley and author of No One Ever Told Us That: Money and Life Letters to My Grandchildren.

"I think annuities for young people are absolutely the wrong route to go," he says. "Their biggest problem is lack of money. They're at the age where they should be invested in growth and liquid growth, not locked into any contract."

IALC's survey found that nearly a quarter of Millennials owe more money than they have.

Weliver also says he would rarely suggest annuities to Millennials."It doesn't surprise me that an annuity would be attractive," he says. "The problem is the way a lot of annuities are sold. People get blinded by that idea of a no-risk return."