Annuities and GenX – Why New Annuity Rules May Help the Hopeless Generation

Most folks over the age of 40 have a certain opinion about annuities which may align closely with root canals and black holes. That’s probably because back in the mid-1980s, annuities were the bubble that burst and may have taken down a few college savings funds for the GenX crowd (who then lived through another two burst bubbles and a worldwide pandemic).

Nearly everyone has had the media and news feeds occupied by the global health crisis caused by the pandemic for nearly the last year. Given that, it’s possible that many advisors may have missed the major announcement about changes to annuities rules in March of 2020.

By way of refresher, annuities provide a guaranteed retirement income, which neither spouse can outlive those funds. The IRS defines annuities as “[A] series of payments under a contract made at regular intervals over a period of more than 1 full year. They can be either fixed (under which you receive a definite amount) or variable (not fixed). You can buy the contract alone or with the help of your employer.” Confusingly, the retirement plan offered to some schools and hospitals that is similar to a 401(k) plan is and annuity. “A tax-sheltered annuity plan (often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for employees of public schools and certain tax-exempt organizations. Generally, a tax-sheltered annuity plan provides retirement benefits by purchasing annuity contracts for its participants.”

Most discussions of annuities break them down into categories based on payment of compensation. First, there is immediate versus deferred annuities which differ based on timing, e.g., whether you receive the payments presently or obtain them later. In an immediate annuity, a client gives the broker a lump sum of money and receives payments over time.  Longevity annuities are those where payment is deferred until a specific age, and then provides a specific, predictable amount. Next, annuities differ based on the payment calculation, whether that amount is fixed payment to payment or varies (or is blended as in an equity-indexed annuity). Lastly, annuities fall into individual versus group plans. Individual annuities are as they sound, a contract between an individual and an insurer. Group annuity plans fall into defined benefit plans.

Annuities have slightly different tax treatment than other investment products, and timing of payments may be crucial: the amount invested is not taxed, but the earnings on the annuities may be taxed as income.  However, unlike 401Ks, there is no limit on the amount you can contribute to an annuity, so for folks who need to catch up or who started on retirement planning late, like many GenXers, an annuity might have benefits. Annuities also differ from other investment products in the amount of commission that insurance brokers receive through their sales: many commissions on annuities can amount to 10%.

Of the age groups needing help with retirement GenX may be the leader. One study referred to GenX as generally “hopeless” about retirement – many don’t believe they’ll be able to retire at age 65, and even more have anywhere near enough saved. In fact, one study noted:[1]  “nearly 40% of Gen Xers have no retirement savings strategy.” That same study noted that GenXers face a host of reasons for being behind on retirement, including “Gen X matured during the phaseout of pensions for 401(k) plans, caught amid the rollout.”

Another article[2] put it more bluntly – GenXers have an emotionally negative response to the investment market: “almost half of this generation reportedly lost their wealth between 2007 and 2010 … more than any other generation. The Gen Xer average net worth dropped by 45%, compared to a 25-28% Boomer dip in equity….” 43% of GenXers did not recover from that recession. And GenXers carry six times more debt than their parents did at the same age.  “When it comes to the recent market drops, Kyle Woodley, Senior Investing Editor at says, “The biggest risk to Generation X-ers is themselves…”

And, GenX may have a disfavorable view about specific retirement products. Most folks over the age of 40 have a certain opinion about annuities which may align closely with root canals and black holes. That’s probably because back in the mid-1980s, annuities were the bubble that burst and may have taken down a few college savings funds for the GenX crowd (who then lived through another two burst bubbles and a worldwide pandemic). As the Christian Science Monitor reported back in December of 1983 “The biggest news story in this area this year was Baldwin-United, a financial conglomerate that sold some $3.7 billion in SPDAs before it declared bankruptcy, leaving policyholders at least temporarily unable to retrieve their money. At least some of the money may be permanently lost.” In response, Congress worked for three years on a bipartisan effort to change the tax code. Among those changes finally passed in 1986 were changes to the rules concerning annuities. This accompanied changes by regulatory agencies on the tax treatment of annuities.[3]

Fast forward from 1986 to 2020. In march of 2020, the Securities Exchange Commission (SEC), through a press release on its website, stated “The Securities and Exchange Commission today announced that it has adopted a new rule and related form and rule amendments to simplify and streamline disclosures for investors about variable annuities and variable life insurance contracts. The changes permit the use of a concise, reader-friendly prospectus designed to improve investors' understanding of the contracts' features, fees, and risks.” Alongside that new rule was an effort by the SEC to extend the Best Interest Rule (Regulation BI) to annuities.

Annuities can help provide confidence to many investors that they will have a guaranteed income during their retirement. That guarantee can help them budget and make major decisions (like whether to move to a new location to retire). But the tax consequences of annuities should be considered carefully.

And that’s where Regulation BI can be of the most help to GenXers. By extending regulations that allow investors to feel more confidence in investing, those investors may, in turn, be able to take advantage of additional retirement products that can help them catch up. That means the 43% of GenXers who are still knocked down by the 2008 recession (and may have been knocked down a second time by the economic crisis from COVID-19) could get back on track with a little help from annuities.

[1] For more on this study, please visit

[2] For additional detail, please visit

[3] For an excellent overview of the law on annuities, see

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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