“It’s impossible to know if annuity rates will increase. Holding too much cash while waiting for annuities to go up may put you behind the eight ball when the time comes to retire.” Scott Self
Annuities are an ideal choice for pre-retirees and retirees looking for safe growth, tax advantages, protection of principle, or legacy creation. An annuity is the bedrock of any income and retirement plan because it is the only financial product that creates guaranteed income for life. Unfortunately, a low-interest rate environment has some seniors putting off adding annuities to their retirement and income portfolios. Many retirees and pre-retirees hold large amounts of cash that are subject to erosion by inflation. They hope that rates for safe money products will eventually increase.
If you have considered purchasing a fixed annuity but are waiting until rates go higher, you might want to rethink your position. There are definite trade-offs when you decide to delay an annuity purchase, including the impact of mortality improvement and changes in bond yields that can affect your assumed portfolio’s rates of return. Costs associated with a delay vary according to your age and risk tolerance. For instance, if you are a conservative investor with little to no appetite for risk, it might not make sense to put off purchasing an annuity. Likewise, if you are over 70, it probably doesn’t make much sense to wait.
Delaying the purchase of an annuity because you’re hoping rates will go up is a bet that most people are sure to lose. In the long run, you are more likely to end up losing money if you wait. For example, if you put $150,000 into a five-year annuity at 2.70%, it will be worth $158,209 in two years, provided you don’t take any withdrawals and allow the interest to compound. However, if you took that same $150,000 and put it into a money market account with a yield of .50%, you would have only earned $151,503.75, a difference of $6,705.25! Catching up to the same account value will take you years unless you manage to find an annuity that pays over 4%, which is not that likely. Plus, unlike a money market account, an annuity allows you to grow your money tax-deferred, making it an even more valuable asset. As you can see, it doesn’t make sense to avoid purchasing a fixed index annuity with a longer term when you will almost certainly earn more interest than cash equivalents such as CDs or money market accounts. However, if you do believe annuity rates could go up in the future, then you might try splitting your annuity allocation into halves. One half you would use to lock in rates today, and the other half you could hold onto in case rates happen to increase.
The Bottom Line:
In a world that rewards spenders and punishes savers, it’s tempting to allow your emotions to drive your money decisions. Fear of missing out on potential stock market gains might cause you to delay purchasing an annuity. It’s a wise idea to sit down with an annuity expert to discuss your options. Your advisor can help you determine whether it’s better to purchase a fixed annuity now or wait until later.