Throughout the years, fixed annuity sales have been highly correlated with the 10-year U.S. Treasury rate. This is why sales of these financial vehicles have been somewhat sluggish for the past decade or so… at least until recently, as interest rates in the economy have taken an upward turn.
With that in mind, the question on many investors’ and retirees’ minds now is whether or not rising interest rates are signaling a good fixed annuity buying opportunity.
Why Consider a Fixed Annuity as Interest Rates Climb
In 2022, the annuity industry saw an increase in the sales of fixed annuities – and there are plenty of good reasons for this. For instance, as millions of Baby Boomers continue to approach retirement, the protection of principal has become much more important to them than the growth of assets.
Over the past 25 years, three of the worst stock market declines in the last 122 years have taken place. So, for many Boomers, risking higher growth with their savings, which includes the risk of loss – even with the possibility of recovery – is no longer an attractive alternative.
In addition, with more companies doing away with the defined benefit pension plan, many current and soon-to-be retirees will no longer receive guaranteed retirement income from their employers – and they will instead be faced with creating this incoming cash flow on their own.
A fixed annuity can help them to do just that – regardless of what happens in the stock market – along with various other potential features, like penalty-free access to funds in the event of a terminal or critical illness and/or a long-term care need.
Fixed Annuities versus Bonds in a Rising Interest Rate Environment
In the past, investors have often put money into bonds when the stock market was down. When this happens, the prices of bonds will generally increase – which in turn can cause the Fed to reduce interest rates (driving up the price – and also the value – of bonds).
But of late, just the opposite has occurred. In 2022, when the Federal Reserve increased interest rates in order to combat inflation, bonds actually performed poorly, in turn, eliminating the most commonly-used “safe” haven for investors.
With a fixed annuity, though, a rate can be locked in for the longer-term horizon. In addition, unlike the interest that is generated by bonds, gains that take place in annuities are tax-deferred. This can help to boost the value of the account significantly as compared to a fully taxable investment.
When the time comes to start generating retirement income, fixed annuities can provide another advantage, too. For instance, these financial vehicles can continue to pay out a known amount of cash flow, either for a pre-set time period (such as 10 or 20 years), or even for the remainder of the recipient’s lifetime – regardless of how long that may be.
Further, while a fixed annuity will continue to pay out a lifetime stream of income, bonds will eventually mature – and if interest rates have fallen during the bond’s holding period, investors and retirees can face reinvestment risk and in turn, a potential reduction in future income.
Is a Fixed Annuity Right for You?
Fixed annuities are insurance products – and because of that, they can offer investors and retirees a number of nice guarantees. But there are many fixed annuities available in the marketplace today, and they all may not be exactly the same.
Because of that, it is essential that you have a good understanding of how fixed annuities work before you make a long-term commitment to purchasing one. This is where talking over your specific situation and goals with an annuity expert can be beneficial.
At Annuity Gator, our annuity and retirement income specialists focus on educating consumers – as well as financial professionals – on how annuities work, and where these financial vehicles may (or may not) fit into a portfolio.
So, if you would like more information, feel free to contact Annuity Gator at (888) 440-2468 or through our secure online contact form. We look forward to helping you navigate your retirement savings and income strategy.