The popularity of fixed annuities has grown quite a bit recently, and it isn’t hard to figure out why. Tax deferral and guaranteed rates are just two of the perks offered with these retirement planning tools. However, with interest rates at historic lows, many consumers are wondering if they should wait to purchase in order to lock in a higher rate. According to a recent Kiplinger article, waiting is not recommended and could actually put you behind in your retirement savings.
It is impossible to know when, or even if, annuity rates will increase, which means the rate you get today may be the best you’ll do if you decide to wait. But let’s say that magically rates do improve significantly. There’s still a good chance you’ll never come out ahead, because while you were waiting, your money market fund or bank savings account will earn next to nothing. That means if you wait too long, you’ll never catch up later.
Chances are, fixed-rate annuities might pay more than you think even though rates are currently low. As of April of this year, five-year fixed-rate annuities are earning up to 2.90% annually. And three-year contracts are bringing in 2.25%. That’s not too shabby when compared to the top rated five-year CD (1.15%) or three-year CD (0.95%).
Let’s compare. Say you put $100,000 into a five-year annuity that is paying 2.90%. Five years from now, it will be worth $115,366 if you don’t take withdrawals and let the interest compound. If instead you put your money into a money market account yielding 0.20% while you wait for higher rates, after two years you’d be behind the annuity by $5,484. In order to catch up and achieve the same value after five years, you’d need to purchase a three-year annuity paying 4.72%, which is not likely. And this doesn’t even take into account the benefits of the annuity’s tax deferral.
The Kiplinger article refers to this interest-rate waiting game as a form of passive gambling; one you’re almost certain to lose. Instead, they recommend considering a strategy of half now and half later, if you just can’t get comfortable with today’s rates. Emotions are often to blame for poor financial decisions, but the statistics show that it’s better to commit to a fixed-rate annuity now rather than wait for a possible higher rate in the future.
As always, it is recommended that you speak with a trusted financial advisor before making an annuity purchase. There are many pros and cons, and it’s always best to have the big picture before signing on the dotted line.
Benefits include guaranteed set rates, unlimited tax-deferral until you make withdrawals, lower taxes on Social Security benefits for some retirees, and some liquidity. Drawbacks include potential surrender charges, IRS penalties for withdrawals made before age 59 ½ , and income tax charges on any interest withdrawn unless the annuity is in a Roth IRA. Additionally, annuities aren’t insured by the FDIC like bank CDs, but they are considered to be quite safe. Still, it is always recommended that you discuss any questions or concerns BEFORE purchasing a contract.
Questions, comments or concerns? We’d love to hear from you! To speak to one of the annuity experts at AnnuityFYI, visit our website, www.annuityfyi.com, send us an email at email@example.com or give us a call at 1-866-223-2121.
Written by Rachel Summit