Grandparents, as you transition into your retirement years the change in interest rates could have a significant impact on some of your income streams. That is why it is important to pay close attention to rates and where they go.
Annuities are definitely one of the common retirement products affected by the movement of interest rates, so it is very important to know the facts before implementing any annuity strategy. Here are a few tips to help shop for what is right for you.
Which interest rate you should follow?
The U.S. 10 Year Treasury Note is the interest rate barometer of most annuity pricing models. If you follow current 10 Year Treasury rate equivalents from other countries, the U.S. rate is currently very high in comparison.
The bottom line is that if the U.S. 10 Year Treasury percentage moves higher, there will be better annuity guarantees with all product types.
Fixed Rate Annuities
Multi Year Guarantee Annuities (MYGAs) are also known as Fixed Rate Annuities. An MYGA guarantees an annual percentage yield for a specific contracted period of time which makes it similar to a Certificate of Deposit (CD).
If interest rates are higher, the annual yield guarantees will be better.
Income Annuities
Lifetime income guarantees from an annuity are primarily based on your age (i.e. life expectancy) at the time you start the payments. A secondary pricing mechanism involved in determining the lifetime payment amount is current interest rates.
If rates are higher, then the payment guarantees will be at a higher contractual level as well.
Ladder the purchase
There’s no way to perfectly time interest rates in conjunction with your annuity purchase. One strategy to combat this timing issue is to ladder the purchase over time. Laddering means that instead of buying the annuity all at once, you can buy in incremental dollar amounts over time.
By laddering the purchase over time – for example, buying incremental amounts annually for a few years – it gives you the opportunity to lock in rates as they hopefully move higher.
There’s no perfect answer
All annuities benefit from higher interest rates. That’s an easy to understand and obvious fact, and covers every product type including deferred variable and indexed annuities. The hard part is trying to figure out the best time or the best way to buy the annuity that solves your specific situation.
My advice is to look at the contractual guarantees offered, and if those solve for your stated goals, then it might make sense to move forward with the annuity strategy regardless of the current interest rates. I also recommend that you write down what you think the contractual guarantee is and make your agent sign it in agreement. If they won’t, then warning bells should start going off in your head.
Keep a close eye on the U.S. 10 Year Treasury Note, get quotes from numerous carriers, and always own an annuity for its contractual guarantees. Or you can remember my motto, own an annuity for what it “Will Do. Not might do.”
Multi Year Guarantee Annuities (MYGAs) are also known as Fixed Rate Annuities. An MYGA guarantees an annual percentage yield for a specific contracted period of time which makes it similar to a Certificate of Deposit (CD).
Stan The Annuity Man is one of the country’s leading Independent Annuity Agents. He is nationally recognized as an annuity critic and expert, and has been called one of the most outspoken consumer advocates for annuities. Stan is the most read and most controversial annuity commentator in the country, and his book The Annuity Stanifesto has quickly become the go-to-resource for all things annuity. For more information go to:www.stantheannuityman.com
For more of Stan’s annunity wisdom:
Top Mistakes By Annuity Shoppers
How The Annuity Free Look Can Save You From A Big Mistake
