Interest rates are historically low right now. There are a lot of consumers who think they should hold off on buying an immediate annuity until interest rates go up. In an article for CNN Money, Walter Updegrave answered the question should you “Buy an annuity now or wait for interest rates to rise?” A reader wrote in asking Mr. Updegrave if he should wait to buy an annuity because interest rates are going to go up soon. The problem with waiting for interest rates to rise is that no one has any idea when that might happen. People have been expecting interest rates to increase significantly for almost six years now. And while they have seen slight increases, they have gone down during periods as well.
When you buy an immediate annuity, your lifetime income payment is based almost solely on current interest rates and your age. Higher interest rates and a higher age make for higher payments. It seems like a smart decision to wait to purchase an annuity until interest rates are considerable higher because you take advantage of those rates and your age increases as well. But you have to account for two important factors. First of all, interest rates might not rise and secondly, you will receive fewer lifetime income payments when you buy your annuity at an older age.
Bond yields are the determining factor for annuity rates. The author does think that bond yields will increase in the future, but there is really no way to know when or how much. He points out that the recent Brexit issue overseas makes things even more questionable in the industry. It could be a long time before interest rates rise to the level that people hope they will be at in order to purchase their immediate annuity. If that is the case and they wait it out, they could be losing out on significant monthly income that would wash out any increase in interest rates.
There is another thing to consider when you are wondering if you should wait for interest rates to rise before buying an immediate annuity. If rates do rise, you might be tempted to wait even longer and see if they rise more. This could put you in a cycle of waiting and waiting and then eventually losing out on the highest interest rates as well as all of the income you could have received while waiting to make your annuity purchase.
Before you buy an annuity, figure out how much guaranteed income you will need in retirement. Take into account all of your expenses, especially those high medical costs retirees often forget about. You can use an online retirement calculator or work with an advisor to determine this amount. Then deduct the monthly income you will receive from Social Security and any pension income. If there is a large discrepancy between the income you will have coming in and your expenses, an immediate annuity might be the right product to cover that income gap. You can use an online annuity payment calculator to see how much money you’ll need for a premium payment in order to get the annuity income you desire.
A lot of people have a hard time really estimating how much money they will need in retirement. Mr. Updegrave says that he sometimes recommends purchasing a shorter term annuity or one with a smaller amount of funds to begin your retirement. Then, after a year or so when you have a better gauge of your expenses and overall spending, you can purchase another annuity or even stagger the purchases into a few more annuity products. Figuring out exactly how much income you will need isn’t the only advantage to staggering annuity purchases. You might also get to take advantage of increasing interest rates. It’s not wise to wait until interest rates rise before buying an immediate annuity to cover your retirement income needs. Figure out how much income you will need to cover your expenses and buy annuities in stages if you are not completely sure about those income needs. You might get to take advantage of increasing interest rates, but you shouldn’t wait for that assuming it will definitely happen.
Written by Rachel Summit