Excited by a surging stock market and initial expectations that President Trump’s goal to lower taxes and substantially boost U.S. infrastructure spending would become reality, some prospective annuity buyers have been waiting for rates to broadly rise before purchasing an annuity.
For them, here is a head’s up: Annuity rates and bank CD rates may well not rise.
So if you’re parking the money to buy the annuity in, say, a money market fund, you may be better off buying an annuity today and reaping much higher rates instead of waiting for a scenario that simply will not materialize.
The fact is, the U.S. economy is not growing faster and inflation – the foundation for interest rate levels – remains very low. Three Federal Reserve short-term interest rate hikes since December 2015, which should also tend to push up long-term -term rates, have pretty much done nothing.
Here is the proof for that: The benchmark 10-year U.S. Treasury note is now yielding 2.29%, down from as high as 2.39% in early July and a 2017 peak slightly above 2.6% in March.
While the unemployment rate has dropped to fresh lows, the U.S. economy continues to pretty much limp along. It rose 1.4% in the first quarter and is expected to grow 2.3% or 2.4% in the second quarter. In short, it’s behaving almost exactly as it has for years and remains historically weak.
So, too, is inflation.Personal-consumption expenditures, which poked above the central bank’s 2% goal in February for the first time in nearly five years, has settled lower each month since. The most recent data, for May, showed a 1.4% year-over-year gain.
“I think (economic) expectations after the election got way ahead of themselves,” Richard Moody, chief economist at Regions Financial, recently told Marketwatch. “Growth is pretty much where it’s been the past eight years.”
An organization that spends a lot of time and money studying global economies- the International Monetary Fund (IMF) – has similarly dialed back its expectations for U.S. economic growth and accompanying inflation. The IMF recently cut its growth forecasts for the U.S. economy to 2.1% in 2017 and 2018, saying the Trump administration’s push for annual growth of more than 3% for a sustained period was unlikely to be achieved.
One reason, the IMF said, is that the labor market is already at alevel consistent with full employment. A second reason is that the IMF has dropped its previous assumption that the Trump administration’s tax cut and fiscal spending plans would boost growth, citing insufficient details to expect these plans to actually occur.
Annuities are not for everyone. Many offer an option for lifetime income – typically the biggest selling point – but fees can be high and the money is relatively illiquid. Those concerned about this might be wise to sidestep annuities. But those who like them and are simply waiting for fatter annuity payments are probably making a mistake.
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