I had a conversation with a client the other day, we had been discussing a particular fixed indexed annuity, and his concerns were that he wanted to wait to see how far interest rates would rise before putting his money in an annuity.
I told him that might seem like a sensible decision, but nobody knows how far interest rates will rise, and every year that you’re sitting on the sidelines is a year you may be losing out on the potential interest that is lost because of loss of time value of money. You see you might be able to make up an interest rate or work harder to make more money but what you WILL NEVER make up is time and the time value of money is as significant as the interest you earn on your money.
For example, let’s say you have $100,000 in a 10-year product paying you 2% at the end of 10 years you would have accumulated $121,899. Now let’s say you waited 6 years and interest rates doubled from 2% to 4%. If you then purchased that product over the next 4 years you would have a total of $116,986, now that is almost $5000 less than you would have had if you had purchased the 2% product in year 1.
If you waited those 6 years before purchasing, now it would take an interest rate of 5.1% (from 2%) for the next four years to equal that $121,899.
Never underestimate the time value of money.