With Interest Rates Near Zero, Annuities Help Pick Up the Slack
What do retirees do with their money when interest rates are next to nothing? Here’s how pulling annuities into the mix can help.


A headline in The New York Times the other day caught my eye. It read: Rates at Rock Bottom Are Expected to Linger in Fed’s Latest Forecast.
The question that would be worthy of an in-depth article is, What Do Low Interest Rates Mean to Current and Future Retirees?
Based on conversations I’ve been having about exporting our Income Allocation planning method to Japan, which experienced the “Lost Decade” of ultra-low (and even negative) interest rates, this is on the minds of investors around the globe. I tell them — and you — that an Income Allocation plan for retirement income that includes annuity payments should help address their concerns.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What to do with the cash in your retirement portfolio earning almost no interest?
Investors have a few reasons to hold a portion of their savings in cash or money market accounts:
- You are trying to time the market, pushing your cash to the sideline, waiting for the right time to get back into the market. Successfully timing the market is often a result of dumb luck. Good for you if it worked out once, but who today can predict what stocks — rocketing up one day, plunging the next — are going to do tomorrow, much less over the next few years?
- You want your funds to be liquid in case of an emergency. Everyone should have some cash stashed away for when the roof needs replacing, or your grandson’s car blows an engine. It is also important to build cash flow (not simply cash alone) for expenses that are scheduled and that you can anticipate, like in-home health care as you age.
- You have invested in higher-risk income sources and you hold cash as a secure source of income to supplement the riskier sources. But at zero percent returns, it is contributing almost nothing to your cash flow.
A better strategy: Include annuity payments in your retirement mix
Strong retirement plans include a mix of products to produce the results you seek. Annuity payments can address the issues above. But often investors (and their advisers) don’t consider certain products because of a lack of understanding or just misinformation.
Also, they repeat certain myths like, “Don’t lock in a long-term annuity payments contract when interest rates are low.”
Let’s look at the real economics, and the process of adding annuity payments to your income sources.
Digging into annuity payments
While you’re waiting for interest rates to go back up, you could adopt a plan that includes annuity payments to generate five to six times the amount of interest you are earning now from your 20- to 30-year Treasuries, as well as an even higher multiple on short-term cash.
Here is an example for a 70-year-old woman who has $1 million in savings in U.S. Treasury securities, split between short- and long-term. Another $1.5 million is in the market, and she hopes that a part of that investment will make up for her low earnings on the interest portion of her savings.
With the $1 million, her Treasury investment as of July 18, 2020, will return $11,100 a year. But with annuity payments, her investment applied as a premium on the same date could generate as much as $66,400 after tax. In other words, each year in Treasuries costs her $55,300 in cash flow. For two years it's over $110,000, or 11% of the original $1 million.
How might she apply this strategy in her portfolio? It’s unlikely that she uses all of the $1 million to purchase the income annuity in the example above. Here are some possible approaches:
- In light of current low interest rates, she could consider a review of her plan for retirement income and consider income annuities as part of the sources of income.
- She could take a small step and allocate, say, 25% of the fixed income portfolio to income annuities. With that, she’s more than doubling the cash flow on that part of her savings.
The cost of waiting
What must happen in the stock and bond markets for her to find that additional 11% that she would have gotten with annuities? Unfortunately, if and when interest rates go up, the price of the underlying bonds will likely go down, decreasing the value of the portfolio. Based on our studies, there’s almost no scenario that works better than adding annuity payments to her retirement mix.
The Fed says it plans to keep interest rates low until 2022. That’s a long time for retirees and others who are hoping their savings will earn enough to cover costs for the rest of their lives. And the period of low interest rates could last much longer.
As you can see, there is a huge cost in waiting.
Are you ready to help your hard-earned savings earn more income with low risk? Visit Go2Income and design your own income allocation plan.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Jerry Golden is the founder and CEO of Golden Retirement Advisors Inc. He specializes in helping consumers create retirement plans that provide income that cannot be outlived. Find out more at Go2income.com, where consumers can explore all types of income annuity options, anonymously and at no cost.
-
Cord Cutting Could Help You Save Over $10,000 in 10 Years
How cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement Rule
The '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
You Were Planning to Retire This Year: Should You Go Ahead?
If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get It
The Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning Playbook
Consider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care Solution
If you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a Recession
Recessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income Planning
Once you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial Plans
Financial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
To My Small Business: Well, I've Been Afraid of Changin', 'Cause I've Built My Life Around You
While thinking about succession planning might feel like anticipating a landslide (here's to you, Fleetwood Mac), there are strategies you can implement to manage the uncertainty and the transition.