There are currently other options out there with the potential to yield higher income than bonds and market investments. Payouts from annuities are also more 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 rates were just at their highest point since 2001. Higher interest rates, however, are advantageous for some products (and some policyholders) more than for others. We’ll examine the details today.
What is an Annuity?
Annuities are contracts between an issuing insurance company and you, the policyholder. Depending on the type you select, an annuity may offer flexible withdrawal options, tax-deferred growth potential, set or variable returns, and other features 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 insurance company you work with.
Basically, you fund the annuity with a portion of your savings (the premium), and the insurance company gives you monthly payments that, depending on the features you select, could last for the rest of your life (as long as the insurer is still solvent).
What Makes Annuities Different?
It’s very important to note that annuities are not savings accounts, nor are they investments. Additionally, annuity payout rates are frequently higher* than some other options because, unlike those options, an annuity payout includes both your principal and an additional return. A fixed indexed annuity (FIA) bases its returns on the performance of a market index. However, it also protects your money (backed by the carrier’s claims-paying ability).
Annuities are unique because the insurer typically commits to paying these benefits for a predetermined amount of time. For example, 20 years. Or, it could be arranged so payments last you the rest of your life or, in some cases, the life of a spouse.
If you are going to be retiring soon or have already done so, you might want to create a budget and classify your expenses as “essential” or “discretionary.” In our opinion, it makes sense to use reliable or even guaranteed income sources, such as Social Security, pensions, and even an annuity, to pay for your basic needs. It could be beneficial to consult with an annuity expert to help you weigh the advantages and disadvantages, associated expenses, and available benefit options. We might be able to assist.
Higher Interest Rates
One important advantage is the opportunity to lock in higher interest rates for a longer period of time. This could provide a sense of security, and portect against future interest rate drops (which we’ll discuss). If you depend on an annuity for your income, rising interest rates may result in a higher income potential, which could help you maintain your standard of living. It’s critical to weigh these benefits against any potential downsides and take your unique financial needs and aspirations into account. Get in touch with us to learn more.
Something to Consider
High interest rates on annuity products may help you earn more money in retirement, but this is dependent on your age.* The younger you are, the more important this is; if you’re in your 50s, higher rates may help you lock in a higher lifetime income. When you’re in your 80s, higher interest rates don’t seem as important. “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.”*
Furthermore, interest rates may fall later this year, even despite the higher-than-expected inflation early in the year, which may delay Fed rate decreases. The possibility of rates dropping provides extra incentive to purchase some type of annuity sooner rather than later. However, you should make sure the type of annuity is appropriate for your long-term financial goals. Reach out to a qualified financial professional to learn more.
Annuity Bonuses
There are currently higher-than-ever bonuses available on certain fixed indexed annuity products. One product, for instance, offers a 32% income bonus. Another promises a boost of up to 42%. There are multiple ways to increase the value of your annuity, earn interest, and leave a legacy with these time-limited options. Please get in touch with us if you haven’t purchased an annuity before. Or, if you have already purchased one, you might want to think about upgrading your policy. Is it the best choice for you? To find out more about these extremely limited-time benefits and higher interest rates, get in touch with us or come to one of our events.
*Sources: Kiplinger, Charles Schwab, Annuity Watch USA
