How Higher Interest Rates Impact Annuities

Bonds and market investments aren’t the only assets with the potential to generate higher income right now. Annuities are also offering bigger payments than they were in years prior. Annuity returns are based on market interest rates. Given that interest rates just recently reached their highest level since 2001, overall conditions are favorable for purchasing an annuity. These higher interest rates, however, benefit some products more than others. Today, we’ll look at the details.

What is an Annuity?

An annuity is an agreement between an insurance provider and you, the policyholder. An annuity may provide set or variable returns, opportunities for tax-deferred growth, flexible withdrawals, and other benefits, such as the ability to leave a legacy for a successor, depending on the type you choose. The kind of annuity, the specific contract, and the issuing insurance firm will all affect the fees and costs, including sales commissions. You deposit a portion of your savings (the premium) to the annuity, and the insurance company pays you monthly benefits that, based on the features you choose, may last you the remainder of your life (provided the insurer stays solvent).

What Makes Annuities Unique?

Annuities are not savings accounts, nor are they investments. This is a crucial distinction to make. Because an annuity payout combines your principal with additional returns, as opposed to some other income sources that do not, annuity payout rates are frequently higher.* Your returns from a fixed indexed annuity (FIA) are determined by how well a market index performs. However, they also safeguard your funds (backed by the claims-paying ability of the carrier).

What makes annuities unique is that the insurer usually agrees to pay these benefits for a set period of time, such as twenty years, or even for the rest of your life and, if you choose, the life of a spouse.

You may wish to create a budget and categorize your expenses as “essential” or “discretionary” if you have already retired or plan to retire soon. We believe it makes sense to consider covering some, if not all, of your basic needs with reliable or guaranteed income sources like Social Security, pensions, or perhaps an annuity. Seeking advice from a financial specialist could be helpful in balancing the benefits and drawbacks, related costs, and accessible solutions.

Higher Interest Rates

One big advantage is the possibility to lock in higher interest rates for a longer length of time. This may create a sense of security and help protect against future interest rate decreases (we’ll get to that). Rising interest rates may increase the income potential of annuities, allowing you to maintain your standard of living even with the rising cost of living. It is critical to weigh these benefits against potential negatives and analyze them in light of your own specific financial objectives and circumstances.

Something to Consider

Depending on your age,* annuity products with higher interest rates could increase your retirement income. This is a bigger deal the younger you are; if you are in your 50s, higher rates could enable you to secure a higher lifetime income. This don’t seem to matter as much when you’re older, however. For example, if you’re in your 80s. “It matters much more the younger you are,” says David Blanchett, head of retirement research for PGIM DC Solutions, “At this point, payouts are mainly based on life expectancy.”*

In addition, even with higher-than-anticipated inflation earlier this year (which might delay rate cuts), the Federal Reserve could decrease interest rates. The likelihood of lower rates provides an additional incentive to purchase some type of annuity sooner rather than later. However, you should ensure that the type of annuity is appropriate for your long-term financial objectives. There are several options available, and it’s important to determine which is the best fit for you.

Fixed Indexed Annuity Bonuses

Certain fixed indexed annuity products are now offering larger bonuses than ever before. One product, for example, offers a 32% bonus income increase. Another promises a bonus income increase of up to 42%. With these limited-time options, there are multiple ways to grow the value of your annuity, receive income, and leave a legacy.

Whether you’ve never considered purchasing an annuity before, or already have purchased one, consider contacting us. Even if you already own an annuity product, you may want to upgrade it while the time may be right to do so. Which option is best for you? Contact us to learn more about these limited-time bonuses and higher interest rates. Schedule a meeting with us or attend one of our events.

*Sources: KiplingerCharles SchwabAnnuity Watch USA 

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