Current annuity payout rates have declined but nonetheless remain better than they have been in years.
Are you interested in financial trends, credit card and home mortgage rates, or the economy overall? Regardless, these topics are highly likely to impact your life, for better or worse, and a huge development in September on these fronts has sparked continuing conversations among a huge number of adults.
The Federal Reserve cut interest rates for the first time — and a lot — in more than four years, and did so again this month. One winner, albeit modest, already is mortgage rates. The average 30-year mortgage rate is now just under 6.9%, according to Bankrate, down from a peak of more than seven percent roughly two years ago.
Nonetheless, folks have felt a sting, which in particular has enveloped retirees. Insurance companies have begun trimming annuity payout rates, often more than once, in response to the Fed’s actions. This hurts retirees, most of whom rely on fixed incomes, and more cuts are highly likely, especially next year.
Perspective is critical, however. Current annuity payout rates have declined but nonetheless remain better than they have been in years. What prospective annuity customers should do is take a hard look at an appealing annuity or annuities and strongly consider activating a purchase now, before annuity rates are cut again. Retirees may ultimately decide that an annuity is not for them, at least today, for one reason or another. That’s fine. But if the purchase of an annuity seems appealing, now is an excellent time to act.
Futures markets show that investors think the Fed will cut 25 basis points again in December and more thereafter, starting after January 2025. Altogether, future markets project another 1.25 in percentage point cuts in 2025, although this could change based on the movements of the financial markets.
There are two key lessons here: One is that annuity payout rates and future payout rates are more likely to fall, not rise. The other is that it’s better to lock in an annuity purchase with a contract that lasts longer, not shorter. It’s likely to be more beneficial over time if additional interest rate cuts and annuity payout cuts are on the horizon.
“Almost all annuities are down from their relatively recent peaks, in some cases meaningfully, and they should decline further,” says a knowledgeable annuity broker. “The only question mark is the timing.”
Lower interest rates lead to lower payouts because insurance companies can’t earn as much when investing the premiums. Life insurance companies mostly invest in corporate bonds, government bonds and mortgage-backed securities. As a result, they’re trying to project how these conservative fixed-income investments will perform over the next decade or more.
Here are select annuities representative of their product class:
- MYGAs (multi-year guaranteed annuities)
Athene Max Rate 5, as an example, is currently paying 5.05% annually. This is the case in five- and seven-year MYGAs, down from a peak of 6.15% a year ago. Since then, it has trimmed interest rates roughly a half dozen times.
Another MYGA – Heartland National- Secure Rate 5, the most generous five-year MYGA today, is currently paying 5.40% percent annually, down from a peak of 5.8% a year ago.
Overall, most five-year MYGAs are now paying 5.2% to 5.4%, down from a peak earlier this year of 5.5% to 6.15%.
Additional MYGA interest rate cuts are expected; however, they may drop less than other types of annuities because they are extremely popular. Insurance companies tend to be careful in keeping interest rates as high as possible to remain attractive. They can also afford to be relatively generous because annuities have been posting record annual sales since 2022.
- Income FIAs (Fixed Index Annuities)
The most generous income FIA, isnow paying a single 65-year-old man, investing $100,000 and adopting a five-year deferral $11,830 annually, down marginally from earlier this year.
- Immediate Annuities
Our 65-year old man who invests $100,000 in Athene Activate would receive $7,484 annually for life, also mildly down from earlier this year. Other attractive immediate annuities are Nationwide Income Promise Select and Jackson National, which also pay marginally less annually. By the end of the year, the Athene annuity’s annual payout will likely decline further, perhaps to about $6,500, and competitors will likely follow suit.
- Structured Annuities
Athene Amplify, a six year product and the most generous in this category, offers a 130% S&P 500 participation rate with a 10% downside buffer if our aforementioned man invests at least $100,000. Those who prefer a 20% downside buffer would get a 121% S&P 500 participation rate. These numbers are down from a peak of a 145% and 130% respectively in their S&P 500 index participation rate for the 20-month period that ended last March.
Another structured annuity worth mentioning is Equitable Structured Capital, also a six-year product. This stands as an example of how sharply index participation rates can decline. This is a so-called dual direction annuity, which means investors can make money on the downside, as well as the upside. Currently, the cap on this annuity’s investment on the S&P 500 is 65% — down drastically from 150% last March. (The specifics of protective buffers remain unchanged.)
- Growth FIAs
One attractive growth FIA is Athene Accumulator, which offers a 300% index participation rate in the low volatility BNP Paribas Multi Asset Diversified 5 index. This is down from 380% at the end of last year, which encompasses four cuts along the way and is another example of a draconian decline of a potential payout rate.
The big picture is as important as all these details. Why an annuity? The answer is that good annuities usually make sense for many older investors, even if current payout rates are not at their peak. This is because many of them always outpace investment alternatives, notwithstanding the investment climate. One example is that MYGAs always beat handily bank CDs. Another example is structured annuities. These offer downside protection in the form of the so-called buffers. Downside protection doesn’t exist in the stock or bond markets.
There are always some folks interested in annuities but procrastinate, in part, because they have better things to do than shopping annuities. And some figure that inflation will return and boost interest rates, producing another opportunity for a better annuity deal. The latter is not impossible, to be sure, but unlikely to be the case in the medium term.
The bottom line is that interest rates often change unexpectedly, often impacting changes in annuity payout rates. But barring a serious recession, which always undercuts interest rates and annuity payout rates, it’s really never a bad time to make a good investment. Rather than play an interest rate guessing game, it’s far more important to base the purchase of an annuity on your needs and financial situation.
