Fed Is Raising Interest Rates. How Do Retirees Benefit?
Some sectors of the population may feel the pain of interest rate hikes, while current retirees, and those near retirement, could actually benefit.
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.
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.
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.
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.
-
Six Ways Women Can Overcome Any Financial Obstacles Holding Them Back
To improve your financial situation, focus on empowering yourself first.
By Kiplinger Advisor Collective Published
-
Should You Enroll in Medicare if You Still Have a Job?
This question is being asked more than ever these days, so here’s what you can do when it comes to making Medicare decisions while you’re still working.
By Jae W. Oh Published
-
Should You Enroll in Medicare if You Still Have a Job?
This question is being asked more than ever these days, so here’s what you can do when it comes to making Medicare decisions while you’re still working.
By Jae W. Oh Published
-
Three Big Ways That Life Insurance Can Be a Lifeline
Life insurance not only provides a safety net for loved ones and leaves behind a lasting legacy, but the cash value can also help during financial hardship.
By Steve Sugumele Published
-
Romance Scams That Target Older Adults Rising: What to Do
Here are some tips to help you avoid falling for a scam, especially when a scammer tries to prey on your affection.
By Patrick M. Simasko, J.D. Published
-
Lessons Learned From Britney Spears’ Financial Conservatorship
The pop star’s recent memoir reveals the toll her involuntary conservatorship took on her and spotlights the drawbacks of these legal arrangements.
By Stacy Francis, CFP®, CDFA®, CES™ Published
-
Four Things to Know About Managing a Loved One’s Finances
Figuring out when it’s time and knowing how to talk about it are just the start. You also need info about estate plans, insurance and health care decisions.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Three Tax-Smart Strategies for Real Estate Investing
Opportunity zones, Delaware statutory trusts and real estate income funds can help investors maximize gains and mitigate taxes.
By Dwight Kay Published
-
Can Language Apps Teach You to Speak a Foreign Language?
Your expectations might be too high if you think an online language platform can teach you to have a meaningful conversation in a foreign language.
By H. Dennis Beaver, Esq. Published
-
Avoid Surprises: Don’t Procrastinate on Your Taxes
You really should start thinking about next year’s taxes immediately after filing this year’s. Better tax efficiency could save you some serious dough.
By Jared Elson, Investment Adviser Published