Sales of immediate annuities hit a record $8.3 billion last year, according to data collected by the industry group Limra; in the late 1990s, they averaged less than a third of that. That alone wouldn’t be newsworthy, except that investors typically shun this type of financial product, which provides retirees with a secure stream of payments, when stocks are on their way up.
Immediate annuities promise payments for life in exchange for a one-time deposit. The payout amounts are usually fixed, based on interest rates at the time of purchase. Nevertheless, the payments can be higher than what an individual would get if he invested the same amount in U.S. Treasuries, because on top of collecting interest he’s getting back a bit of his principal. (Funds are pooled, so there’s more to go around as people die.) A 72-year-old man who purchased a $100,000 immediate annuity would collect about $8,000 annually, according to New York Life Insurance, the largest seller last year. “If you’re a little bit risk averse, if you’re worried about running out of money, there’s nothing like it,” says Olivia Mitchell, a professor of insurance and risk management at the University of Pennsylvania’s Wharton School.