annuities

Waiting for Fixed Annuity Rates to Rise Doesn’t Pay

If you like the guaranteed rates and tax deferral that fixed annuities offer, but you want to wait because you’re hoping rates will improve, think again. Here’s why keeping too much in cash while you wait puts you behind … and you may never catch up.

If you’re considering buying a fixed-rate annuity, which acts much like a tax-deferred version of a bank CD, should you wait until rates move higher?

Probably not.

First, it’s impossible to know when or if annuity rates will move up. The rate you get today may be as good as or better than the one you’ll get if you wait.

Second, even if you do luck out and rates rise substantially, you’ll almost certainly come out behind. While you’re waiting, you’ll earn almost nothing in a money market fund or a bank savings account and only a bit more in a “high-yield” account. Depending on how long you wait, it may be nearly impossible to catch up later.

Despite recent declines, fixed-rate annuities still pay more than you might think. As of April 2021, you can earn up to 2.90% a year on a five-year fixed-rate annuity and up to 2.25% on a three-year contract, according to AnnuityAdvantage’s online annuity rate database. Compare that to the top rate for a five-year CD, at 1.15% and 0.95% for a three-year CD, according to Bankrate.

How delaying puts you behind

Let’s say you put $100,000 into a five-year annuity currently paying 2.90%. It will be worth $115,366 five years from now if you don't take withdrawals and let your interest compound.

Suppose you instead put your money in a money market account yielding 0.20% and wait for higher rates. After two years you’d be behind the annuity by $5,484. To catch up and achieve the same value at the end of five years, you’d need to find a three-year annuity paying 4.72%, which seems highly unlikely.

And this calculation doesn’t include the benefit of the annuity’s tax deferral.

Playing the interest-rate waiting game is a form of passive gambling, and it’s a bet you’re almost guaranteed to lose.  It doesn’t make financial sense to avoid longer-term fixed annuities when interest earnings can be dramatically improved over cash equivalents.

If you’re uncomfortable about locking in today’s rates, consider a strategy of half now and half later. Allocate today half of the funds you’re considering for fixed-rate annuities. Set aside the remaining half in case rates increase soon.

Emotions too often drive financial decisions. But the numbers show it’s better to commit to a fixed-rate annuity today rather than wait for some potential higher future interest rate that may never come.

Fixed annuity pros and cons

Before you invest in an annuity, be aware of the pros and cons.

Benefits include guaranteed set rates, unlimited tax-deferral until you take money out, lower taxes on Social Security benefits for some retirees, and some liquidity. Most fixed-rate annuities let you withdraw interest or up to 10% of the value annually without penalty. Larger amounts are subject to a surrender charge if withdrawn before the surrender period is over.

Another drawback is that the IRS penalizes annuity withdrawals before age 59½. So, don’t use an annuity for any money you’ll need before 59½. You’ll also have to pay income taxes on any interest withdrawn unless the annuity is in a Roth IRA.

Unlike bank CDs, annuities aren’t insured by the FDIC. But they are considered quite safe. Fixed annuities are guaranteed by life insurance companies, which are strictly regulated by the states to ensure solvency. And fixed annuities are also protected by state guaranty associations up to certain limits.

A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

About the Author

Ken Nuss

CEO / Founder, AnnuityAdvantage

Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.

Most Popular

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How
social security

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How

It’s always smart to maximize your Social Security benefits, and if you are divorced, one way to do that might be to take them based on your ex’s earn…
May 13, 2021
Refunds for $10,200 Unemployment Tax Break to Begin This Week
Coronavirus and Your Money

Refunds for $10,200 Unemployment Tax Break to Begin This Week

The IRS will start issuing automatic refunds in mid-May to people eligible for the unemployment benefit tax exemption.
May 14, 2021
Updated Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 4.5% in 2022
Economic Forecasts

Updated Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 4.5% in 2022

This would be the largest cost-of-living adjustment for Social Security benefits since 2008.
May 12, 2021

Recommended

5 Ways to Prevent Working Mom Burnout
careers

5 Ways to Prevent Working Mom Burnout

Practical advice on managing the demands that come from handling a career and a family at the same time … from one working mom to all the others out …
May 15, 2021
Is Your Spouse a Financial Bully? Subtle Signs of Abuse to Watch for
personal finance

Is Your Spouse a Financial Bully? Subtle Signs of Abuse to Watch for

Does your spouse sabotage your career or demand you tell them about all your purchases? These are signs they are trying to control you through money. …
May 14, 2021
Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How
social security

Yes, You Can Collect Social Security from an Ex-Spouse: Here’s How

It’s always smart to maximize your Social Security benefits, and if you are divorced, one way to do that might be to take them based on your ex’s earn…
May 13, 2021
Here’s What Couples Need to Know About Merging Finances
personal finance

Here’s What Couples Need to Know About Merging Finances

Couples trying to mesh their money styles have a lot to think about. To help decide how to handle things, try some tips from a financial adviser who h…
May 12, 2021