Annuity returns are based on market interest rates, and interest rates were recently at their highest levels since 2001, making it an overall favorable time to buy annuities, although rising interest rates will favor some products more than others.
Here we look at how rising interest rates will affect different types of annuities.
Fixed Index Annuity
Fixed annuities pay higher guaranteed rates in line with current market conditions. Fixed index annuities are also becoming a better deal. Many annuities now offer higher return caps as insurance companies are making more money.
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The interest rate environment is less important for variable annuities because the yield is determined by the performance of the mutual funds in which they are invested, not by interest rates.
Initial Bonus
Many annuities also pay an initial bonus of 10% or more as a percentage of the amount deposited.
“If you bought an annuity years ago when interest rates were low, it may make sense to surrender the contract to get a better rate. The surrender value can help offset surrender charges,” says Mindy Oglesby, a certified financial planner and CEO of Oglesby Wealth Strategies in Watkinsville, Georgia.
How old is the pensioner?
If you're looking for income, higher interest rates may boost your income, but that depends on your age. “The younger you are, the more important it is,” says David Blanchette, head of retirement research at PGIM DC Solutions, the investment management division of Prudential.
If you're 55, your payout is based on the insurance company's investment of your money over the long term. Higher interest rates can help you secure a higher lifetime income. If you're 85, a higher interest rate doesn't matter as much. “Right now, your payout is based primarily on your life expectancy.”
Chances of a rate cut
Interest rates could fall later this year, but higher-than-expected inflation in early 2024 could delay the Federal Reserve from cutting rates. Lower rates would provide even more incentive to buy some types of annuities early.
But before you buy, make sure an annuity fits your long-term financial goals. If you surrender your annuity early, surrender charges could wipe out any gains you made by buying it when interest rates were higher.
Note: This item first appeared in Kiplinger Personal Finance Magazine, your trusted source of monthly advice and guidance. Subscribe here to help you multiply the money you make and keep more money in your pocket.
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