Bonds and market investments aren’t the only options out there with the potential to generate higher income right now. Annuity payouts are also higher than they’ve been for a while. More specifically, the returns on annuities are based on interest rates. Generally speaking, since rates were just at their highest level since 2001, now may be a good time to purchase an annuity. Why exactly is that? Today, we’ll discuss the details.
What is an Annuity?
An annuity is a contract between you (the policyholder) and an insurance provider. Depending on the type you choose, an annuity may provide set or variable returns, tax-deferred growth, flexible withdrawals, and other benefits, such as the ability to leave a legacy to an heir. Fees and charges, including sales commissions, will vary according to the type of annuity, the individual contract, and the issuing insurance provider.
Basically, you contribute a portion of your savings (the premium) and the insurance company pays you in monthly income payments that, depending on the features chosen, may be able to last the rest of your life. Assuming, of course, the insurer remains solvent.
What Makes Annuities Different?
Annuities are not savings accounts, nor are they bonds or market investments. Making this distinction is vital. The payout from annuities, unlike other income sources, combines your investment with an additional return. With a fixed indexed annuity (FIA) the performance of a market index affects your returns. However, your money also remains protected (backed by the claims-paying ability of the insurance company).
An important feature of an annuity is that the insurer normally promises to make these payments for a set amount of time—say, 20 years—or even for the remainder of your life or, perhaps, the life of a spouse if you choose that option. If you’re approaching (or have already entered) retirement, consider categorizing your costs as “essential” or “discretionary.” We believe it is prudent to consider covering some, if not all, of your necessary needs with reliable or guaranteed income sources such as Social Security, pensions, and maybe an annuity. It may be beneficial to consult with a financial advisor to help you weigh the advantages and downsides, expenses, and numerous options available. We might be able to help with this.
Higher Interest Rates
One big advantage is the possibility to lock in higher interest rates for a longer period of time. This may create a sense of security and protect against future interest rate decreases (we’ll get to that). Rising interest rates may increase the income potential of annuities, allowing you to reliably maintain your same standard of living in the future if you rely on an annuity for income. It is critical to weigh these benefits against potential negatives and analyze them in light of your own specific financial needs and goals.
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, higher rates may help you secure a higher lifetime income. In contrast, high interest rates don’t really matter if you’re 80 years old.
“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.”*
It’s also crucial to remember that interest rates may drop later this year, even if the Fed’s decision to reduce rates may have been hampered by early-year inflation that was higher than anticipated. The potential for rates to decrease may be an additional incentive to buy certain types of annuities sooner rather than later. Make sure the annuity type, however, is suitable for your long-term financial goals. There are other choices options, as well as different products that might work better for you, personally. To find out more, get in touch with an experienced professional. Here’s where we can assist you.
Fixed Indexed Annuity Bonuses
In order to keep up with market conditions, fixed indexed annuities (FIAs) are currently paying higher rates. Additionally, fixed index annuities have lately improved in value. Since insurers are making more money these days, many now provide higher potential caps for your returns.* On the other hand, since variable annuities have a different method of calculating return, the current state of interest rates has less bearing on them. Generally speaking, we would advise purchasing an FIA because of the added safety feature (backed by the claims-paying ability of the carrier).
Some fixed indexed annuities are currently offering bonuses that are higher than ever before. For example, one product offers a 32% income bonus. An additional option offers a bonus as high as 42%. With these limited-time options, there are multiple ways you can earn interest, collect income, and leave a legacy with an annuity.
If you haven’t considered an annuity before, please contact us. Or, even if you already have an annuity, you might want to consider upgrading it. Is this the right decision for you? Speak with us to learn more. Please contact us or visit one of our events to learn more about these limited-time bonuses and higher interest rates.
*Sources: Kiplinger, Charles Schwab, Annuity Watch USA
