Annuities base their returns on market interest rates. Given that rates were recently at their highest level since 2001, conditions over-all are favorable for buying an annuity. But higher rates benefit some products more than others.
Here, we look at how higher interest rates impact different types of annuities.
Fixed index annuities
Fixed annuities are paying higher guaranteed rates to match current market conditions. Fixed index annuities have also become a better deal. Many now offer higher possible caps for your returns as insurers are earning more.
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.
The interest rate environment doesn’t matter as much for variable annuities, as the returns depend on the performance of the mutual funds they invest in rather than rates.
Initial bonuses
Many annuities also pay initial bonuses as a percentage of your deposit that can be worth 10% or more.
“If someone bought an annuity years ago when rates were low, it could make sense to break a contract to get the better rates. A bonus would help offset the surrender charge,” says Mindy Oglesby, a certified financial planner and CEO of Oglesby Wealth Strategies in Watkinsville, Ga.
How old is the annuity holder?
High interest rates could help you earn more if you’re looking for income, but it depends on your age. “It matters much more the younger you are,” says David Blanchett, head of retirement research for PGIM DC Solutions, the investment management division of Prudential.
If you’re 55, the amount of your payout is based on the insurer investing the money for the long term. High interest rates can help you lock in higher lifetime income. If you’re 85, high interest rates don’t matter as much. “At this point, payouts are mainly based on life expectancy.”
The possibility of rate cuts
Interest rates could fall later this year, although higher-than-expected inflation in early 2024 may delay rate cuts from the Federal Reserve. The possibility of declining rates provides extra incentive to purchase some types of annuities sooner than later.
But before you pull the trigger, make sure an annuity is appropriate for your long-term financial goals. If you cancel an annuity early, surrender charges could wipe out any benefit you gain by purchasing it when interest rates are high.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
What to Know Before Flying With Your PetFrom documentation and TSA screening to carrier rules and airport relief areas, here’s what to know before taking your pet on a flight.
-
We Are Peter Lynch: How to Invest in What You KnowTake a look around, go to a free stock market data website, and get to work.
-
Want To Retire at 60? See if You Can Answer These Five QuestionsForget waiting for Social Security and Medicare to kick in. You may be able to retire sooner than you think.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a StrategyLike presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.
-
Is a Family Office Right for You? The Multimillion-Dollar QuestionAs ultra-high-net-worth individuals increase in number, many are turning to family offices to manage their complex finances. Here's how family offices work, courtesy of a finance professional.
-
The Hidden Cost That's Ruining Vacation Home DreamsAre rising HOA fees derailing your second home dreams? Annual dues, insurance premiums and taxes are rising, boosting total ownership costs. Here's what you can do.
-
If You're Ignoring Private Markets, You're Missing Most of the ActionPrivate markets are becoming increasingly essential for all investors, not just institutions, and they are now more easily accessible thanks to innovative investment structures.
-
Three Ways Women Can Keep Caregiving From Draining Them FinanciallyMany women care for older relatives. While commendable, it could put their retirement at risk … unless they find a way to prioritize themselves.
-
Retire in Malaysia for Affordable LuxuryMany expats retire in Malaysia, a Southeast Asian country with a world-class city. Come for the affordable living, stay for the top-notch health care and cuisine.
-
I'm a Financial Professional: This Is the Roth Conversion Mistake Too Many People MakeConverting your traditional IRA to a Roth can be a fantastic tax-saving move, but you've got to be smart about two things: how much and when.
