You Lose Security by Waiting to Purchase Annuities When Interest Rates Rise

The Forbes article, “Should you buy an annuity at retirement, or wait?,” questions whether it is wise or not to buy an annuity in a financial environment where interest rates are slowly rising.  Robert Schmansky’s original question asks if investors should move everything in their portfolio into an annuity at retirement.  His answer in an increasing interest rate environment is most likely not.  But in reality, it rarely makes sense to put all of your money into an annuity anyways, regardless of what is going on with interest rates.  So the question we are more concerned with is whether you should be putting any of your money into fixed annuities when interest rates are on an upswing.  The bottom line is that if the benefits of annuities make them the right product for you, it doesn’t exactly matter what time in the financial cycle you buy them.  You might alter the amount you spend at once though.

Single premium immediate annuities are the author’s annuity of choice and the type used in the article’s example.  He looked at someone using $500,000 to purchase an annuity two years ago when Treasury note yields were 2.05%.  In the past two years, that percentage has increased to 2.6%.  That seemingly small increase gets an investor an additional $1,000 or so each year in annual payouts.  As interest rates are rising and if they are expected to continue along that path, it can often make sense to ladder your annuity purchases.  Basically, you buy an annuity now that is smaller than your overall goal for annuity purchases.  You will receive the monthly income you need at retirement and save the rest of your money to buy another annuity with another chunk of change when rates rise in the future.

The author also considers whether the annuity purchaser should have just waited to buy an annuity altogether.  That is a risky proposition, especially because we don’t actually know if interest rates are going to rise, even if they are forecasted to.  Receiving a specified return is not guaranteed in many other products, so even if you aren’t getting the “best” return, you could be getting nothing or even have a loss with other products.  In addition to the return aspect, annuities are purchased for their security and the fact that the insurance company is taking the risk away from you.  Laddering annuities can be a good way to combat inflation and make sure that you aren’t losing out when interest rates are increasing.  But waiting to buy your annuity until interest rates go up takes away your guarantees and your monthly income payments in retirement when you need them to pay the bills.

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