Is Your Annuity Working for You in Retirement? – Key Reasons to Reevaluate Now

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When was the last time you reviewed your annuity? If you’re like many annuity holders, it might have been a while. With interest rates at all-time highs and significant economic changes on the horizon, now is a crucial time to take a closer look at your annuity. In this blog, we delve into why reevaluating your annuity is essential and the key reasons it might be time for a change. 

The Current Economic Landscape 

Interest rates have experienced a dramatic increase recently, benefiting not just banks but also insurance companies and, by extension, your annuities. The economic environment is dynamic, and keeping your financial products up to date with these changes is crucial. Here’s why a review of your annuity is more important now than ever. 

  1. Interest Rate Changes

The primary reason to reevaluate your annuity is the significant shift in interest rates. Just a few years ago, interest rates were incredibly low which made any fixed-income investment, (including annuities) less attractive. Fast forward to today, and the Federal Reserve has implemented 11 interest rate hikes between 2022 and 2023. This increase has opened new opportunities for better returns on annuities. 

If your annuity was purchased in a low-interest-rate environment, its growth potential might be limited compared to newer products available now. For example, an annuity purchased in 2017 when bank rates were near zero might not be performing optimally in today’s environment where banks offer around 4% interest. 

Reevaluating your annuity could reveal opportunities to switch to a product that leverages current higher interest rates, potentially earning you significantly more in the long run. Even if there’s a surrender charge for early withdrawal, the long-term benefits might outweigh the costs. 

  1. Inflation Rates

Higher inflation rates impact everything from food costs to the purchasing power of your retirement income. If your annuity includes a lifetime income rider, now is the time to assess whether it will meet your future income needs, given the current economic climate. 

Inflation can erode the real value of your fixed income. By evaluating your annuity, you might discover that switching to a newer product with better terms could substantially increase your guaranteed income, helping you keep pace with inflation. We’ve seen cases where clients were able to boost their guaranteed lifetime income by 20% just by moving to a new annuity with better terms. 

  1. Unnecessary Riders

Riders can add valuable features to your annuity, such as guaranteed lifetime withdrawal benefits. However, they often come with additional costs. Over time, your financial situation might change, making some of these riders unnecessary. 

For instance, if you’ve significantly increased your savings or received an inheritance, you might no longer need a guaranteed lifetime income rider. Removing unnecessary riders can reduce your costs and potentially increase your annuity’s growth potential. 

Consider whether the features you initially paid for are still relevant. If not, eliminating them can streamline your annuity and enhance its efficiency. 

  1. Life Event Changes

Major life events, such as changes in marital status, employment, or health, can significantly impact your financial needs. These changes might mean that the annuity you purchased years ago no longer aligns with your current situation. 

For example, a change in health might alter your retirement income needs, or a shift in employment status could affect your overall financial strategy. Reevaluating your annuity considering these life changes ensures it remains a suitable part of your financial plan. 

Understanding Surrender Charges and Bonuses 

One common concern when considering an annuity change is surrender charges. These are fees for withdrawing from an annuity before a specified period. While surrender charges can be significant, it’s essential to consider the overall financial picture. 

Insurance companies often offer bonuses to entice you to move your annuity to them. These bonuses can offset surrender charges, making the switch more financially feasible. For instance, if your current annuity is worth $100,000 but has an 8% surrender charge, you might hesitate to move it. However, if the new annuity offers a 10% bonus, your new balance could be $101,200, more than covering the surrender charge. 

It’s crucial to work with a financial advisor to crunch the numbers and determine whether moving your annuity is beneficial. The goal is to ensure that any move makes sense financially and aligns with your long-term goals. 

The Importance of a Personalized Review 

Everyone’s financial situation is unique, and there’s no one-size-fits-all answer when it comes to annuities. That’s why it’s essential to conduct a personalized review with a financial professional who understands your specific needs and goals. 

A thorough review should include: 

  • An assessment of your current annuity’s performance. 
  • An analysis of how changes in interest rates and inflation affect your annuity. 
  • An evaluation of the relevance and cost of any riders. 
  • Consideration of any recent life events that might impact your financial strategy. 

Take Action Today 

If you haven’t reviewed your annuity recently, now is the time to act. With interest rates and inflation impacting your financial landscape, ensuring your annuity aligns with your current and future needs is crucial. 

A personalized review can provide valuable insights and uncover opportunities to optimize your annuity. Whether it’s switching to a product with better terms, eliminating unnecessary riders, or adjusting for life changes, taking action today can set you up for a more secure financial future. 

If you would like to have a conversation about your annuity situation, or you just have a question about annuities, we’d love to hear from you! Schedule your complimentary call with us to get started. 

By incorporating these strategies and regularly reevaluating your annuity, you can ensure that it continues to serve your financial needs effectively. Don’t let your annuity become outdated – take control of your financial future today. 

July 17, 2023 Weekly Update

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We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for July 17, 2023

CLICK HERE TO WATCH THE UPDATE

This Week’s Podcast – Annuities or CDs – What You Should Consider

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the similarities and differences between annuities and CDs and the best one for retirement planning. In as much as CDs and fixed index annuities are similar, CDs are best suited for short-term investments, while annuities are best suited for long-term investments.

CLICK HERE TO LISTEN TO THE PODCAST

 

CLICK HERE TO WATCH ON YOUTUBE

This Week’s Blog – Annuities or CDs – What You Should Consider

“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

CLICK HERE TO READ THE BLOG

Annuities or CDs – What You Should Consider

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“Annuities or CDs?” is a question many folks are asking because interest rates on CDs are the best they’ve been in a long time. In this article, we’ll cover both annuities and CDs to help you better understand which option is right for your current retirement planning strategy.

Wait. CDs? They’re No Good, Right?

We haven’t talked about CDs for a long time. Interest rates weren’t that attractive in past years. Most people were lucky to receive 1% to 2% returns. Clients who want to reduce market risk can, at the time of posting this article, go out and get a 1-year CD at 5.5%, or a 5-year CD at 4.5%.

With returns like this, we have a lot of people questioning why they would put their money into an annuity – especially a fixed annuity.

First, we need to consider putting the funds into the right place for your retirement focused plan. You have a lot of options when investing, including the following three main categories:

1. Growth

You can put your money into growth assets, such as equities, because they have the highest return potential. These assets would include things like ETFs, stocks, and mutual funds.

These funds need to remain in the market for some time and have the risk of volatility. Markets go up and down all the time, and your funds will follow this trend, too. You do have the potential to lose money with equities, but we do have controls in place to limit these potential losses.

2. Safety

If you want to have a good rate of return without the risk of losing money on it, you’re now in the following territory:

  • CDs
  • Treasury Bonds
  • Fixed Annuities

These investment vehicles protect you from market losses, so you don’t need to worry about that, but you may earn less with a fixed option.

3. Cash

Easy money access. If you need liquidity, this is the avenue that you’ll want to choose because it gives you access to the money without penalties when you need it. However, you will not receive a high rate of return.

 Keeping this in mind, we’re going to expand on the second category, “safety”, because that’s where the discussion of CDs vs. annuities really exists.

Interest Rate Risks of CDs and Annuities

CDs and annuities are the “hot topic” right now. Interest rates have gone up due to inflationary measures and banks are now able to offer better rates on CDs than they have in a long time. The Fed’s goal is to tame inflation, and when it does go down, interest rates will also come down.

If you buy a CD today at 5% and allow it to reach maturity, you can choose to:

  • Take the money and put it back in a CD
  • Take the money out and put it into other investments

CD renewals will allow you to buy the CD again at current market rates. It’s very likely that rates will come down and you may have a CD rate of 3.5% or 4% at renewal – or lower. Two years from now, CDs may be 2% or 1.5%.

These lower interest rates are your “reinvestment risk”.

We like the idea of putting a portion of our client’s money into the six-month or one-year CDs, if they know they’ll use these funds in the next year and will need to access them. In the meantime, they will receive a nice return on their investment.

Fixed Indexed Annuities and Their Potential 

Fixed Indexed Annuities (FIAs) are driven by interest rates, so just like CDs, the interest rates have gone up in the last year. The key difference between a CD and an FIA is the length of the contract you receive. For an annuity, the term is longer, such as 10 years.

You may receive a 4.5% – 5.5% interest rate on CDs for 1 year or more. Over the past 10 years, FIAs with no riders or fees have had returns of 4% – 6%. Compared to CDs, this range for annuities was much higher.

In today’s market, because of higher interest rates you can receive an FIA that averages 5% to 10% over a 10-year period. However, you may have some years with 0% returns.

How does that work?

Annuities are linked to an index. For example, S&P 500:

  • S&P 500 rises 10%, so you earn 10%
  • Next year, the S&P 500 drops over 10%. Since you are protected from market losses in an FIA, you do not lose any money in that year.

Fortunately, FIAs often have many index options that allow you to diversify your potential and gain more opportunity.

We believe FIAs are really a bond alternative, as they are both conservative and protect against risk. Bonds in 2020 – 2022 hurt portfolios more than they helped.

Clients often look to bonds to make 3% – 5%, but FIAs offer:

  • Greater return opportunities
  • Principal Protection (protection from market losses)

Of course, if you have money that you want to park for a year and then use the money, put it into a CD and make your 5% return. However, for long-term investments and the potential to make more money, it often makes better sense to go with an annuity.

Annuities are longer-term, but the reward is more consistent. CDs are shorter-term and, while they have their place today, will see rates go back down as inflation falls and interest rates follow.

Do you want to read more about how to secure your retirement?Click here to view our latest books covering this topic, or schedule a call with us.