“If you are waiting for interest rate hikes before purchasing an annuity, you may want to reconsider.” Joe Edgeworth
The Federal Reserve has begun declaring interest rate changes in the past few months. If you currently have an annuity or are considering buying one, you might wonder if those rate increases will affect your annuity’s payouts. If your portfolio skews heavily toward bonds, now may be the time to re-evaluate that position and consider adding a fixed index annuity (FIA).
Annuity rates aren’t directly affected by Fed rate changes because the Fed rate is short-term, while annuities reflect long-term rates. While there may be a slight relationship between the two, the Fed rate is typically not the best indicator of imminent changes in annuity rates.
However, interest rate hikes almost certainly hurt bonds, especially in a traditional 60% equities, 40% bonds matrix. In this mix, bonds usually form the lion’s share of a person’s “safe money,” Fed rate hikes have the potential to dampen a bond’s attractiveness as a safe money vehicle. That’s why hesitating to look into this right now might cost you later. If you are waiting for multiple Fed interest hikes before purchasing an annuity, you may want to reconsider.
Different kinds of annuities react to rate hikes differently.
If you have s single premium immediate annuity (SPIA), your return is a combination of both principal and interest, and higher rates will increase your lifetime payout amounts. Unfortunately, though, higher rates could also change life expectancy tables to work against you. The same is true of longevity annuities because their returns are an annuitization of principal and interest. Qualified longevity annuities (QLACs) and deferred income annuities (DIAs) are examples of longevity annuities.
Traditional fixed annuities, sometimes known as multi-year guarantee annuities (MYGAs), work like certificates of deposit (CDs). Just like CD yields, fixed-rate annuities increase when interest rates go up.
On the other hand, fixed indexed annuities (FIAs) function much differently than traditional fixed products because they are linked to stock market indices. Whether you gain the benefits of an upmarket depends on what happens during your indexed annuity’s term. When the Fed increases interest rates, you’ll typically get higher returns on your FIA, depending on your index crediting strategy. While you won’t take advantage of 100% of any market gains with a FIA, you have more significant protection from market downturns.
Conclusion: If you are thinking about adding an annuity, you should know that waiting until rates rise may not be your best choice.
Years of low interest rates made it challenging for seniors seeking principal protection, locked-in rates, and guaranteed lifetime income. Although an annuity can undoubtedly offer these things and more, recent low rates made them seem less attractive. Since annuity pricing tends to improve as interest rates increase, fixed indexed annuities have become a more viable alternative to bonds and other safe money products. High inflation will certainly pressure the Fed to raise rates, perhaps multiple times in the next few years, which is why an annuity makes sense for many pre-retirees and retirees.
Income is critical during retirement, and adding the right kind of annuity ensures you will have a stream of reliable income to supplement Social Security and other retirement accounts. If you’re someone who understands the importance of having streams of guaranteed income, along with protection of principal and longevity protection, you should contact a qualified retirement income specialist. Your advisor will help you discover the pros and cons of different annuities and whether this safe money vehicle is right for you.