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Who would have thought that high interest rates would present a major buying opportunity? (Definitely not your local real estate agent or mortgage broker.) While high rates can make borrowing costlier and slow down housing markets, they also open favorable opportunities in financial products like annuities. In other words, annuities are back and stronger than ever before! There are reasons for that.
First, let’s examine the recent shift in interest rates. The 10-year Treasury yield has surged 708 percent from its low of 0.52 percent on August 2, 2020, reaching around 4.20 percent by the end of July. This dramatic increase resulted from the Federal Reserve’s efforts to control inflation, manage employment, and ensure financial stability. As a result, interest rates have reached a 17-year high, comparable to levels not seen since 2007.
Currently, inflation data and consumer prices show great progress, which is leading the Fed to consider its first rate cut since 2022 in September. Note, while it remains uncertain whether inflation is fully under control, the latest indicators suggest it may soon align with the target of two percent year-over-year. With the writing on the wall, we could be at the tail end of the inflationary cycle.
Due to rates potentially heading lower, now is the best time to act and secure elevated rates for annuities. Why? Insurance companies use the 10-year Treasury yield to price their annuity products, so higher yields mean better rates for consumers. This results in money flowing out from equities and into annuities to capture gains, eliminate future volatility, maximize income, and provide peace of mind.
In particular, fixed indexed annuities are growing quickly as the preferred vehicle to maximize retirement income and provide secure growth. Regardless of the type, guarantees are backed by A-rated insurance companies, who must maintain sufficient reserves to pay out claims and meet strict actuarial standards. Arguably, they are the real backbone of America – not banks.
In comparison to annuity rates three years prior, today’s rates are significantly better. For instance, in 2020, a 65-year-old couple who contributed $250,000 in a fixed indexed annuity in 2021
would have received $9,375 immediately, subject to increase.
Additionally, those already holding an annuity in the distribution phase can potentially refinance to a new product for higher income without incurring surrender charges. This of course depends on the product terms and circumstances. For fixed rate guarantees, rates in 2021 were around two to three percent for a three- to five-year term, while current rates have surpassed 5.2 percent.
Outside of the monetary benefits annuities provide, research has shown behavioral benefits as well. Gal Wettstein, senior research economist at Boston College’s Center for Retirement Research, notes, “Economists don’t usually talk about happiness. But when you compare people with annuities to those without, it seems that those with annuities are happier.” He adds, “Annuities provide not only financial stability but also reduce stress related to longevity and market risks, leading to a more comfortable and secure retirement.”
That said, annuities aren’t for everyone. Age, income, expenses, liquidity, and retirement assets all play a role in their suitability. While modern annuities come with features like enhanced death benefits, free withdrawals, no fees, increasing income options, and long-term care (LTC) doublers, they can often be misrepresented.
For example, fixed indexed annuities often have high surrender charges in the early years. So, if you walk away, you can expect to receive 8-10 percent less of your original contribution. This needs to be understood and conveyed.
The saying “Dialogue is the doorway to discovery” is true. If you have the slightest interest in the concept of annuities, I encourage you to work with a financial professional to explore how an annuity would fit inside your retirement. From there, submit a non-binding application to lock in today’s rates. This will help hedge against cooling inflation and potential Fed rate cuts in September.
Kyle Tomko is a field support representative at LifePro Financial Services. He has spent nine years in the financial services industry building meaningful relationships with advisors across the country and has helped to support and grow their practices each year. Tomko coaches hundreds of financial professionals on how to build effective financial strategies that achieve their clients’ long-term goals and helps them stay educated on the latest industry trends. This deep understanding of the business has been instrumental in the value and support he provides for the advisors he works with. Kyle Tomko can be reached at 888-543-3776 or [email protected]
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