With the 500-point drop in the stock market last week, a lot of shareholders are biting their nails and monitoring the news from Wall Street. They’re dreading further losses, and some have moved their money into safe securities. That’s why the prices of Treasury securities have jumped.
If you’re reading this blog, you may also be wondering: “Is this the right time to move my money into some kind of annuity?”
There’s no easy answer to that question. Now is not the time for hasty or fear-driven decisions. But, generally, if you are near or at retirement and already planned to buy an immediate annuity or a variable annuity with living benefits to provide guaranteed income over the next 20 or 30 years, you probably shouldn’t abandon that plan. The decision to buy an annuity for income, like the decision to marry or buy a house, is a long-term, strategic decision, not a short-term tactical move.
Many people hesitate to buy single premium immediate income annuities (SPIAs) when interest rates and annuity payout rates are low (as they are today), preferring to wait until rates are higher. Is that a smart strategy?
It depends in part on where you get the money to buy the SPIA. If you have cash on hand, you may want to wait and take advantage of lower stock prices rather than buy a SPIA. But if you buy a SPIA with the proceeds of selling bonds, this might be as good a time to buy as any. You won’t gain much by waiting for higher interest rates, because higher rates may only drive down the value of your bonds.
The SPIA purchase decision also depends on your age. If you’re over age 70, you can more or less ignore the interest rate environment. Age will be a bigger factor than interest rates in determining the size of your SPIA income. In any case, I’d avoid selling depressed stocks in order to buy an income annuity—or anything else—right now.
Of course, whenever stock prices fall, some people will consider “buying the dip.” Yesterday’s share prices may or may not have represented a buying opportunity. Prices may yet drop even farther. Or they may bounce back. Not even Ben Bernanke knows. Ideally, a diversified portfolio of stocks and bonds will see you through.
But, all else being equal, during a period of high bond prices and low stock prices, a retiree who needs lifetime income could take advantage of both by selling bonds and buying either a variable annuity with living benefits or a SPIVA—a single premium immediate variable annuity. (That’s a little-used type of income annuity where the underlying assets are entirely or partially invested in equities.) When stocks make their eventual comeback, you’ll reap some of the upside. If not, you’ll have a downside buffer.
Written by Kerry Pechter