If you’re a pre-retiree or retiree, should you consider buying at least one annuity today, even though its payout is less than it used to be?
If you are financially comfortable and the annuity/annuities don’t exceed 50 percent of your net financial wealth, the answer is yes. The outlook for the stock and bond markets is mediocre, and guaranteed lifetime income – offered by most annuities – alleviates much of the reason to worry about that.
Some people think this is a bad time to buy annuities because interest rates sit near record-lows. Down the road, if rates rise, they fear they will regret that they locked in rates today. If that were a certainty, that would be true. But it is not. Odds are, rates likely will be higher, but not much higher – and what would investors do while waiting to make the move?
Most would probably park their money in a money market fund, earning virtually nothing. If you are already withdrawing funds to pay living expenses, you could easily wind up spending down more of your principal. Then, if interest rates did subsequently rise, you might be forced to invest less in an annuity and reap no advantage. If some of your funds lie in the stock market and the market declines, that would aggravate the situation.
If viewed in context, annuity interest rates today are actually pretty good.
A 10-year Multi-Year Guaranteed Annuity – the most popular fixed annuity – is yielding as much as 3.25 percent – about 1.4 percentage points higher than today’s 10-year U.S. Treasury note. And if you buy a ladder of fixed annuities, which can begin maturing in as little as three years, you create a partial hedge against the risk of rising rates. If the fixed annuities mature in a higher rate environment, you can reinvest the money in a higher-yielding annuity or other interest-bearing investment.
The bottom line is that trying to time the market is almost always a mistake.