Potential homebuyers frowned at the Fed’s mid-March quarter-point rate hike because they can expect mortgage rates to continue to climb steadily, as they have since January. Freddie Mac’s weekly research bulletin shows that between Jan. 20 and March 24, rates for 30-year mortgages increased more than 1.1 percentage points. A review by the Mortgage Bankers Association revealed that the higher rates are starting to dampen homebuying, with purchases declining by 6% week over week. We have to wait to see whether slowing sales affect how the Fed adjusts its rates.
On the other hand, many retirees are smiling as interest rates creep up. That’s because if a portion of your income is coming from fixed income investments, you can see those yields rise. And one group of retirees could be particularly happy: those who are planning to include annuity payments as one of their sources of income.
Insurance companies sell income annuities, which are the source of annuity payments. They invest the annuity reserves in mortgages and similar loans. When interest rates rise, the insurance companies offer annuities with higher annuity payments, too. An annuity purchased today will pay more than one bought just a couple of months ago. For example, for a woman age 70 who considered purchasing a life-only income annuity with a $1 million premium, the annuity payments increased by 7% from $67,204 on Dec. 21, 2021, to $71,926 March 22, 2022.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
This increase in annuity payments also means you can create more safe income in your plan for retirement income. With both higher and more safe income, you’ll have lots of options on recalibrating your plan.
A Chance at Even Better Annuity Payments Ahead
The Fed says it plans to raise rates several more times over the next year, with one increase expected to be as much as 0.50%. We can expect insurance companies to continue to re-price their income annuities, although not necessarily in lock step.
For every quarter percent Fed rate hike, the income from an annuity might increase by 1.5%. The reason for this multiplier impact is fairly complex and varies by annuity carrier. In its simplest form (which I applied many years ago) the interest rate yield curve on the carrier’s investment was built into the pricing for the life of the annuity and not for a single year.
So, should you wait to buy your annuity until all the predicted Fed hikes have been put in place? Considered in a vacuum, you would do that. But the real world presents variables, such as stock market performance, that should cause you to temper such definite action.
As I wrote during a past stock market dive, ups and downs are unpredictable. Sometimes they’re tied to inflation, interest rates and other economic events; other times a correction might be blamed on pandemics, war and natural disasters. The best response is to create a long-term plan for retirement income that will largely protect your income against negative shocks — but that can also be adjusted to current circumstances.
In other words, maybe the rate hikes will slow the economy and cause a correction in markets. Your increase in income from annuity payments might soften the blow.
Timing Is Everything
Like many others, I advocate that you never try to time the market. In consultation with an adviser, and considering the many possibilities, you might decide you will add annuity payments to your income. At the same time, you might decide to make several purchases spread over a year or more.
A well-prepared plan for retirement income will let you choose from many scenarios that you design. It will also help you choose a mix of income sources to ensure that your risk is spread over many investment types, both safe and a little risky. We want your savings to produce enough income to last the rest of your life and meet your legacy and other goals.
If making all those decisions sounds complicated, I also consistently advise consumers to develop their plans with the help of professionals. At Go2Income, we can provide you with a complimentary personalized plan that delivers both a high starting income and growing lifetime income, as well as long-term savings.
-
Amazon Surge Sends S&P 500, Nasdaq Higher to Start November: Stock Market TodayAmazon inked a $38 billion cloud deal with OpenAI, which sent the stock to the top of the Dow Jones on Monday.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
Eight Steps to Help Get You Through the Open Enrollment Jungle at WorkWondering how to survive open enrollment this year? Arm yourself with these tools to cut through the process and get the best workplace benefits for you.
-
Seven Moves for High-Net-Worth People to Make Before End of 2025, From a Financial PlannerIt's time to focus on how they can potentially reduce their taxes, align their finances with family goals and build their financial confidence for the new year.
-
I'm a Financial Planner: These Are the Seven Tiers of Retirement Well-BeingLet's apply Maslow's hierarchy of needs to financial planning to create a guide for ranking financial priorities.
-
Why More Americans Are Redefining Retirement, Just Like I DidRetirement readiness requires more than just money. You have a lot of decisions to make about what kind of life you want to live and how to make it happen.
-
A Compelling Case for Why Property Investing Reigns Supreme, From a Real Estate Investing ProInvestment data show real estate's superior risk-adjusted returns and unprecedented tax advantages through strategies like 1031 exchanges and opportunity zones.
-
Are You Retired? Here's How to Drop the Guilt and Spend Your Nest EggTransitioning from a lifetime of diligent saving to enjoying your wealth in retirement tends to be riddled with guilt, but it doesn't have to be that way.
-
Government Shutdown Freezes National Flood Insurance Program: What Homeowners and Buyers Need to KnowFEMA's National Flood Insurance Program is unavailable for new customers, increased coverage or renewals during the government shutdown.
-
Separating the Pros From the Pretenders: This Is How to Tell if You Have a Great AdviserDo you leave meetings with your financial adviser feeling as though you've been bulldozed into decisions or you're unsure of what you're paying for?
