Bonds and market investments aren’t the only assets offering potentially higher income at the moment. Annuities are also offering higher payouts than they have in years. More specifically, annuities base their returns on market interest rates (but do not invest your money in the market). Given that rates were recently at their highest level since 2001, conditions are overall favorable for purchasing an annuity. However, higher interest rates benefit some products more than others, and different policyholders more than others. Today, we look at the details.
What is an Annuity?
An annuity is a contract between the policyholder (you) and an insurance company. Depending on what type you select, an annuity may offer fixed or variable returns, opportunities for tax-deferred growth, flexible withdrawals, and other benefits, including the option to leave a legacy to an heir. Fees and charges—including sales commissions—will vary by the type of annuity, the individual contract, and the issuing insurance company. With a single premium immediate annuity, you contribute a portion of your savings (the premium) and the insurance company, in turn, provides you with monthly payments that, depending on the features selected, can continue for the rest of your life (assuming the insurer remains solvent).
What Makes Annuities Different?
It’s important to note that annuities aren’t savings accounts, nor are the payments like interest from bonds or dividends from stocks. Annuity payout rates will often be higher* because, unlike those other sources of income, which don’t include your principal, an annuity payout includes a combination of your principal plus an additional return. With a fixed indexed annuity (FIA), your returns are based on the performance of a market index. However, they also keep your money protected (backed by the claims-paying ability of the carrier).
What makes annuities unique is that the insurer generally agrees that they will make these payments for a defined period—say, 20 years—or even for the rest of your life or, potentially, the life of a spouse if you choose that option. If you are nearing (or have already entered) retirement, consider categorizing your expenses as either “essential” or “discretionary.” The way we see it, it makes sense to consider covering some, if not all, of your essential expenses with predictable or guaranteed income sources like Social Security, pensions, and possibly an annuity. It may be best to work with a financial professional to help you think through the pros and cons, the costs, and the different benefit options available. We may be able to help with this: Reach out to us to learn more.
Higher Interest Rates
One significant benefit is the ability to lock in higher interest rates for an extended period. This may provide a sense of stability and help protect against a potential future decrease in interest rates (we’ll get to that). Rising interest rates may lead to higher income potential from annuities, which may help maintain your standard of living if you’re dependent on an annuity as an income source. It’s important to consider these pros alongside potential drawbacks and evaluate them in the context of your own individual financial goals and needs.
How will rising interest rates for annuities impact your retirement finances? Understanding the impact of higher interest rates is crucial for individuals considering annuities, as it can help them make informed decisions based on their own goals and risk tolerance. Consulting with experts on the subject can provide personalized guidance and insights tailored to you.
Something to Consider
High interest rates on annuity products could help you earn more income in retirement , but it depends on your age.* The younger you are, the more this matters; if you’re in your 50s, higher income could potentially help you lock in higher lifetime income. If you’re in your 80s, high interest rates don’t matter quite as much. “It matters much more the younger you are,” says David Blanchett, head of retirement research for PGIM DC Solutions, “At this point, payouts are mainly based on life expectancy.”*
Additionally, it’s very important to note that interest rates could decline later this year, although the higher-than-expected inflation early in the year may delay rate cuts from the Fed. The possibility of rates dropping provides extra incentive to purchase some types of annuity sooner than later. However, you should make sure the type of annuity is appropriate for your long-term financial goals. There are multiple options, and other products that might be a better fit for you instead. Reach out to a qualified financial professional to learn more. We can help you with this.
Annuity Bonuses
Fixed indexed annuities (FIA)s are currently paying higher guaranteed rates to match market conditions. Fixed index annuities have also become a better deal* recently: Many now offer higher possible caps for your returns, as insurers are earning more. In contrast, the current interest rate environment doesn’t matter as much for variable annuities, as the rate of return on them works differently. In general, we’d recommend purchasing an FIA due to the aspect of safety it comes with (backed by the claims-paying ability of the carrier).
Some fixed indexed annuity products are offering higher-than-ever bonuses right now. For example, one product offers a 32% bonus income increase. Another offers as high as a 42% bonus income increase. These limited-time options come with multiple options to grow your annuity’s value, earn interest, and leave a legacy. If you haven’t considered an annuity before, reach out to us. And if you already own one, you may want to consider an annuity upgrade. Could it be the right option for you? Reach out to us to learn more. Get in contact with us (or join us at our event) to learn about these very limited-time bonuses and higher interest rates in more detail.
*Sources: Kiplinger, Charles Schwab, Annuity Watch USA