Fixed Annuities – Best Rates in Over a Decade
Interest rates are rising, and while this is a concern in many areas, it’s a major driver of fixed annuities. We’re in the best environment for fixed annuities in the past decade.
Anyone who is in retirement planning should consider the benefits of a fixed annuity. However, we do know that annuities may not be a tool that you prefer, and that’s 100% fine – they’re not for everyone.
In our recent podcast, we discussed how fixed annuities work, their structure and how their returns have changed in recent years.
If you have any questions involving fixed annuities, please feel free to contact us for a free 15-minute call.
Why You Might Consider Fixed Annuities
In our view, when you try to secure your retirement, there are two main reasons that you may want to consider fixed annuities:
- Safe alternative investment: The stock market has been extremely volatile. Even the bond market is volatile in 2022, and this is an investment vehicle that is meant to be a safe place for your money. Fixed annuities are a nice bond alternative that can help you offset risk.
- Someone who is looking for guaranteed, lifetime income: Are you looking for guaranteed income? Annuities have lifetime income riders, which will act much like a pension that you would have received years ago.
If you would like either of these points as a part of your retirement plan, then a fixed annuity may be a good option for you.
However, before we go any further, let’s see why fixed annuities are attractive in today’s retirement landscape so that you can better understand whether it’s something that you would like to pursue.
Why Fixed Annuities Are Even More Attractive Than Before
Rising inflation and insurance rates have a lot of investors concerned about their futures and the state of the economy. With the stock market putting everyone on an investment rollercoaster this year, it’s nice to have a fixed annuity as an option.
Fixed annuities benefit from the same factors that are impacting the stock and bond market negatively.
Two companies benefit from inflation and high interest rates:
- Insurance companies
With a fixed annuity, you’re working with an insurance vehicle that offers you a nice risk-tolerance investment.
In the past, fixed annuities had a 3% upside at best, meaning that if you put in $100,000, you would have just $3,000 in returns.
However, the environment is very different today.
Interest is calculated with a beginning and end point. For example, there’s an underlying index for the annuity. Let’s look at an example of an annuity with the S&P 500 as its underlier.
- You start an annuity on January 1
- The ending point is 1 year from today
- If the S&P 500 is up at the end of the year, you make money
- If the S&P 500 is down at the end of the year, you don’t make or lose money
Insurance companies put a cap on the gains that you can make. So, they may say if the index is up at the end of the year, you can make 3%. Would this be attractive to you?
But today, we’re seeing caps as high as 13%.
So, if you go into the year with an S&P 500 underlying asset for your annuity, and at the end of the year, it’s up 13% and your cap is 13%, you get 13% returns. However, if the S&P 500 is up 10% and your cap is 13%, your return would be 10%.
With that said, the true power is when the S&P slumps. Instead of losing out on your investment, you don’t lose anything. You might not accrue interest, but you also didn’t lose money like you would in the stock market.
You lose some upside, but you gain a strong protection against a loss.
Of course, you’re unlikely to gain 13% a year, but you can gain 3% – 6% a year with no risk of a loss. As an alternative to bonds, which are not expected to rebound for a decade, fixed annuities make a lot of sense.
Fixed Annuity Liquidity and Access
Utilizing a fixed annuity does have some nuances, which you should understand before using them. The typical scenario includes:
- Fixed amount of time that you have to commit the money you put into the annuity to the insurance company, which is typically a 10-year period. You make a long-term commitment with a guaranteed principle.
- Normally, you have 10% access of the annuity. For example, if you put in $100,000, you would have access to $10,000. However, if the account grows to $130,000, you would have access to $13,000 for that year.
From a long-term perspective, we look at putting 20% – 50% of their retirement into an annuity. The rest will go into the stock market so that they have 50%+ of liquidity.
Maintaining a good liquidity balance is something that you must consider when looking at fixed annuities.
Fixed annuities have a lot of different options and things to consider that go well beyond just the points above. If you do want to discuss annuities more in-depth, we’re more than happy to hop on the phone with you and have a discussion.