Should I Get an Annuity Now or Wait for Rates to Go Up?
If you have a retirement account, a bank CD, or money sitting around in savings, you may be considering an annuity. Fixed annuities allow you to grow your nest egg at a guaranteed interest rate with no fees and no risk of losing your principal.
But should you jump into a 5-year contract now, or wait for annuity rates to go up first? Here's everything you need to know about annuity rates, timing, and getting strategic.
How Do Annuity Rates Fluctuate Over Time?
Fixed annuity rates on a typical 5-year contract length fluctuate between 2.5-4%.
Before the COVID-19 pandemic, fixed annuity rates were some of the best we’d ever seen, with some companies offering just over 4% on a 5-year contract length.
When the pandemic began, we saw rates start to dip closer to 3%. And as it trudged on, rates came down even more to about 2.8%. An entire percentage point can make a big difference!
Unfortunately, none of us knew a pandemic was coming, and we won’t know when the next crisis will occur that could impact annuity rates. The good news? Fixed annuities always offer a more competitive rate with equal or more safety than the alternatives.
Should I Wait for Annuity Rates to Go Up?
We would never recommend waiting for rates to go up.
If your money is in the stock market, it’s not safe. You could lose your nest egg overnight, even if the return potential is higher than other options. And if your money is in the bank, whether that’s a savings account or a CD, it’s not earning much interest at all. In fact, the average return on a 5-year bank CD is routinely under 0.3%.
That’s 10 times less than a typical fixed annuity.
So, there’s no need to wait. However, you can get strategic about which annuity type you select if you think better rates are on the horizon.
What Annuity Type Should I Choose If Rates Might Go Up Soon?
If you have a gut feeling that rates are going to increase soon, but you want to start an annuity now, you can get strategic!
We would recommend shifting gears by looking at Fixed Index Annuities (FIAs). FIA rates can be much more competitive than a typical fixed annuity, especially if the stock market is doing well.
However, just like traditional fixed annuities, there is no risk of you losing your principal.
In addition, you can reallocate your funds and change your game plan annually when you choose an FIA.
Do Annuity Rates Change Each Year During a Contract?
With traditional fixed annuities, you cannot make any changes to your annuity for the length of the contract. If you start a 5-year contract at 3%, you are guaranteed that 3% return for the entire 5 years.
On the plus side, you have complete certainty about what your returns will be, but if rates do go up during your contract, you’re stuck with whatever the rate was when you started your annuity.
With a Fixed Index Annuity (FIA), you can actually make changes to your game plan every year. You can move some of your funds to a different index crediting strategy or even a fixed account!
The flexibility to reallocate your funds and try to take advantage of better rates makes Fixed Index Annuities a great choice for many retirees.
Annuities are a great avenue for most retirees and seniors with nest eggs or funds they don’t have plans for in the near future.
Unlike the stock market, annuities offer safety, but unlike the banks, they offer competitive interest rates.
If you think annuity rates might go up, consider looking at a Fixed Index Annuity, which allows you to capture more gains when the markets are doing well. You can also change your game plan every year, which offers flexibility.
If you’re interested in learning more about annuities, schedule an appointment by calling our office at 217-423-8000 today!
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