Answers · Annuities

Are annuities a good investment right now?

Rates change the price, not the fit. Higher interest rates do buy more income per dollar, because the insurer is buying bonds with your money. But nothing about a date makes an annuity right for you. The surrender period, the fees and whether you need the income do not move with rates. Fix the fit first, then shop the rate.

There are two questions in there, and only one of them moves with the date.

Where we stand, first. opfinances.com is a licensed insurance agency and annuities are one of the things we sell. We are not a financial advisor and not a fiduciary, and we are paid by the insurance company when somebody signs a contract. Keep that in front of you.

The question splits in half. Are annuities a good investment is about the product. Right now is about the calendar. People ask them as one question and get an answer to whichever half is easier to sell.

The calendar half is real. An annuity is priced off what the insurance company can earn on the bonds it buys with your money, so when long term interest rates are higher, the same deposit buys more income.

The product half does not change at all. How long your money is locked up, what it costs to reach it early, what the fees are, and whether you needed the income in the first place are the same in a high rate year as in a low one. Better timing buys you a better price on a contract that already fits you. It cannot make one fit.

What a better rate environment is worth, in dollars.

Take 200,000 dollars. Treat this as arithmetic rather than a quote, because the real number depends on your age, the contract and the day you ask.

At a payout rate of 6.0 percent that is 12,000 a year. At 6.8 percent it is 13,600. The difference is 1,600 a year, and across 25 years that is roughly 40,000 dollars. So yes, rates matter, by an amount worth caring about.

One correction to how that gets presented. A payout rate is not a return. On a lifetime income contract a large slice of every check is your own principal handed back, so a higher payout rate is partly a better deal and partly just a faster return of your own money. A payout and a yield are two different measurements.

Whatever rates are doing, every promise inside the contract rests on the claims paying ability of the insurance company that issued it.

The pitch never changes direction, and that is the tell.

When rates are high, the line is: lock this in before they come back down.

When rates were low, the line was: rates are heading lower still, lock in what is left.

The conclusion survived both versions of the fact. If the answer is buy now whether rates rose or fell, then rates were never the reason. They were wrapping around a reason that was already there.

We are not outside this. When rates are higher our story is easier to tell and our phone rings more, so watch whose enthusiasm tracks whose commission, ours included. The honest version of the rate argument is a narrow one: higher rates widen the spread between contracts, so they are a reason to pull more quotes rather than a reason to decide faster.

Timing matters here more than almost anywhere, because you cannot take it back.

Buy a CD at a rate you later regret and you are out of it in a year. That is the normal cost of guessing wrong.

An annuity does not work that way. Deferred contracts commonly carry a surrender schedule of seven to ten years, and a lifetime income contract is usually permanent once it starts paying. So a badly timed annuity costs you a decade rather than a year, and a lifetime income contract costs you the rest of your life.

Put the two numbers beside each other. Timing the rate well might be worth 40,000 across 25 years on the example above. Needing that same 200,000 back in year three of a surrender schedule can cost 6 percent, which is 12,000, plus a market value adjustment that moves against you in the exact rate environment that made you want out.

So the honest answer to right now is that the penalty for being early is bigger than the prize for being right. What rates do next year is a smaller question than what happens if your life changes in year three.

If you cannot time it, stop trying to, and split the purchase instead.

The way out of the timing question is to refuse it. Buy in pieces across several dates instead of all at once.

Each piece is priced at whatever is available on its own day, so what you hold sits close to the average of those days rather than a single draw. You give up the chance of catching the top. You also remove the chance of putting every dollar in at the bottom, and only one of those has ever wrecked a retirement.

It buys a second thing that matters more than the rate. Shorter terms maturing on a staggered schedule means some of the money comes back within reach every few years, instead of all of it locked to one distant date. That shrinks the problem above.

Then the test that actually decides it, which has nothing to do with the calendar. Add up the bills that arrive whether or not the market cooperates. Subtract the income that arrives the same way, which for most households is Social Security and any pension. If there is no gap, no rate environment on earth makes this a good buy for you. If there is a gap, a mediocre rate that closes it beats a great rate on a contract you did not need. What else closes that gap is covered on our page about what is better than an annuity for retirement, and delaying Social Security wins that comparison more often than anything we sell.

Related

Do annuity rates go up when interest rates go up?

Generally yes, and with a lag. Insurance companies back these contracts with bonds, so what they can promise tracks what those bonds pay. The lag exists because the company buys into a new rate environment gradually rather than all at once, and because repricing a product line takes time. Rates on deferred contracts and payouts on income contracts respond to the same pressure at different speeds.

Should I wait for rates to go higher before buying an annuity?

Nobody selling you one knows where rates go next, and neither do we. What is knowable is the cost of waiting, which is the income you did not collect while you waited. If you need that income now, the wait has a price you can calculate and a benefit that is pure guess. Splitting the purchase across dates is what most people are reaching for when they ask this.

Is it a bad time to buy an annuity if rates are falling?

It is a worse price, which is not the same thing as a bad decision. If the contract is closing a real gap between your fixed bills and your lifetime income, the job still needs doing. If it was a maybe, a falling rate environment is a fine reason to let it stay a maybe. A rate is a good reason to tip a decision that was already close, and a poor reason to start one.

Are annuity rates better than CD rates right now?

They are often quoted higher, and the comparison is unfair in both directions. A CD is federally insured to the published limit and you get your principal back at the end. A deferred annuity rests on the claims paying ability of the issuing insurer, with a state guaranty association behind it up to published limits, and it locks the money up far longer. On a lifetime income contract the comparison collapses entirely, because the payout includes your own principal coming back and a CD rate does not.

Can I get out of an annuity if rates go up after I buy?

Partly, and it usually costs you. Most deferred contracts allow a withdrawal of around 10 percent a year without a charge, and anything past that hits the surrender schedule. Many also carry a market value adjustment, which moves against you precisely when rates have risen, because the bonds behind your contract are worth less than they were. A lifetime income contract that has started paying generally cannot be undone at all. Read the surrender page of the contract before you sign the application, not after.

Where this fits.

This question sits inside a bigger one. Annuities walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

Start with a conversation