There are currently other options with the potential to yield higher income than bonds and market investments. For example, payouts from annuities* are higher than they have been in a long time. More precisely, annuities don’t invest your money in the market; instead, they base their returns on market interest rates. In general, the time is right to buy an annuity, given that rates were just at their highest point since 2001. Higher interest rates, however, are advantageous for some products and policyholders more than for others. We’ll be examining the details today.
What is an Annuity?
An annuity is an agreement between you (the policyholder), and an insurance company. Depending on the type you select, an annuity may offer flexible withdrawal options, tax-deferred growth options, set or variable returns, and other advantages like the potential to leave a legacy for a successor. The fees and charges, including sales commissions, will vary depending on the type of annuity, the particular contract, and the issuing insurance company. Essentially, you put a portion of your savings (the premium) into the annuity. Then, the company provides you monthly payments that, depending on the features you select, may be able to last you the rest of your life (assuming the insurer stays solvent).
What Makes Annuities Unique?
Annuities, like interest from bonds or stock dividends, are not savings accounts. However, annuities are also not investments. This is a crucial distinction to make. Because an annuity payout combines your principal with additional return, as opposed to those other income sources that do not, annuity payout rates are frequently higher.* Your returns from a fixed indexed annuity (FIA) are determined by how well a market index performs. However, they also safeguard your funds (backed by the claims-paying ability of the carrier).
Annuities are special because the insurer typically commits to paying these benefits for a predetermined amount of time, like 20 years, or even for the rest of your life or, if you so desire, the life of a spouse. If you are going to be retiring soon or have already done so, you might want to take the time to classify your retirement expenses as “essential” or “discretionary.” In our opinion, it makes sense to think about using reliable or guaranteed income sources, such as Social Security, pensions, and even an annuity, to pay some, if not all, of your basic needs. It could be beneficial to consult with an expert to help you weigh the advantages and disadvantages, associated expenses, and available benefit options. We might be able to help.
Higher Interest Rates
The ability to lock in rates for a longer period of time is a significant benefit of these higher interest rates. Despite worries about potential interest rate cuts in the future, this may provide individuals with a sense of security (we’ll get to that). If your only source of income is an annuity, higher interest rates may lead to a rise in your future annuity income, which could help you keep your standard of living. It’s crucial to consider your particular financial needs and goals while balancing these advantages against any potential drawbacks.
How will rising annuity interest rates affect your choices when saving for retirement? Knowing how increasing interest rates will impact annuities is crucial for anyone considering one because it will help them make well-informed decisions based on their unique objectives and risk tolerance. Speaking with experts on the subject can help you obtain specialized guidance and information.
Something to Consider
Depending on your age, high interest rates on annuity products may enable you to have a higher retirement income. This is more important the younger you are; if you are in your 50s, a greater salary may help you secure a higher lifetime income. High interest rates don’t really matter if you’re 80 years old. According to David Blanchett, head of retirement research at PGIM DC Solutions, “it matters much more the younger you are. At this point, payouts are mainly based on life expectancy.”*
It’s also crucial to remember that interest rates may drop later this year, even if the Fed’s decision to reduce rates may be hampered by higher-than-expected inflation in early 2024. An additional incentive to purchase annuities sooner rather than later is the potential for rates to decrease. Make sure the annuity type, nevertheless, is one that fits with your long-term financial objectives. There are multiple types available, as well as entirely different products that might work better for you. To find out more, get in touch with an experienced professional. That’s where we come in.
Annuity Bonuses
There are currently limited-time bonuses being offered on some fixed indexed annuity products. For example, one product gives a 32% income increase. A bonus of up to 42% is offered by another. With these time-limited options, you can earn interest and boost the value of your annuity in multiple ways. If you have never considered an annuity before, contact us. Additionally, you might want to consider upgrading yours if you already own one. Is this the best option for you? Get in touch with us to find out more about these time-limited benefits and increased interest rates. Please contact us or attend one of our events.
*Sources: Kiplinger, Charles Schwab, Annuity Watch USA
