February 4, 2016

If You're Buying a Fixed Annuity Then You Might NOT Want To Wait For Better Interest Rates

Right now interest is low and this is causing the payout on fixed annuities to be low too.   I figure if you're considering buying a guaranteed life fixed annuity right now then it might make sense to wait a little while and see if rates go up so you can get a better monthly payment.   But after looking at the numbers a little, I'm not sure if it will pay off to try that.

I tried to find historical rates for fixed annuities and couldn't come up with much.   The ImmediateAnnuities site has a chart going back to 2003.    Thats not very far but it does show how annuity rates do seem to track in proportion pretty well to AAA corp. bond rates.  

Today if you're buying a fixed annuity then a 65 year old male can get about $534 per month for $100,000.   A 70 year old would get about $598.   So simply buying later will get you more which is based off the lower life expectancy for a 70 year old versus a 65 year old.  

Lets say that you simply lived off of your savings and spent the same $534 per month for 5 years.    You could take about $32,000 and put it in a 1% savings account and drain that down over the 5 years.   The other $68,000 you could put in CDs for 2% and end up with about $75,000.    At 70 years old that $75,000 will only get you about $448 at todays rates.    Now the idea with waiting is that you should be able to get a better annuity rate in a few years if or when interest rates go up.    But in order to get back to at least the $534 a month you'd have had if you bought at age 65 you'd have to have rates go up about 20% from where they are now.    This is actually relatively likely.    But its no given.  

I'd figure roughly that interest rates will need to go up about 2% in that 5 year period just for you to get back to the break even point.   Thats not a safe bet.   Its not a bad bet but its not something you can really count on either.  

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