Climbing Interest Rates Mean Good News for Annuity Buyers

Welcome back, everyone.

Peter, good to see you. We're talking through the climbing interest rates and how it's good news for annuity buyers. The third quarter of 2023 saw record growth in annuity sales. According to Limra, which tracks the numbers, total annuity sales reached $89.4 billion. That is an 11% jump over the same quarter last year.

Tension is now 4%. That is down from 60% in the early 80s. You can look at this precipitous drop over history. Annuities work to provide that guaranteed income. Explain why annuities could be helpful as part of a larger financial plan. Well, annuities, the seven letter, four letter word of the financial world. And, you know, annuities are just a tool and different tools can do different jobs. So annuities may be an appropriate consideration because of this chart that you've got up on the screen there, Aaron. There has been a significant reduction in the number of people who have guaranteed income, which is a specific job that annuity can fill or help to fill as part of your retirement. You know, pensions have all but gone away.

Orissa in 1974 basically incepted the 401k and since then, companies have offloaded the burden of funding retirement onto our shoulders. Now, this generation has done a great job in building personal wealth in their 401ks and retirement accounts. We've amassed more personal wealth than any generation ever before us. And yet we are more uncertain about retirement because that finite amount of money does not equate to income, lifestyle and retirement confidence. We've got this pile of money, but we've got market volatility. We've got spending.

We've got an unknown amount of time that we make need to make that money last. And despite having more wealth than any generation before us, we have more doubt and uncertainty and concern about do I have enough to retire? And that's because pensions have gone away. Annuities can supplement to help fill that role and answer that question. So explain how recent interest rate hikes then have made annuities more attractive. Well, as interest rates have gone up, so have the rates of growth that are offered in annuities or the rates of income that can be expected from an annuity. So the cash flow rate or the deferral growth rate on annuities have gotten more attractive as the interest rate environment has changed. And we have not seen these interest rates for 15 years.

They have not been this high. And that was only a blip on the radar during the Great Recession where they peaked up. It's really been 20 or more years since interest rates have been where they are. So now is a great time to look at locking in an income cash flow rate from a lump sum.

How much can your money generate for you in retirement? Or if you just want some safe accumulation, looking at options that offer an interest rate minus the risk of the market. And that's a place where there are other options, by the way, but annuities can serve that role.

I'm glad you brought up risk. We're just going to look at annuities by risk on the spectrum here. I feel like I'm hearing more about fixed annuities. Peter, are they the most affected by these interest rates? Probably.

Yeah. I mean, as far as like the base of what they offer and we are hearing that, yes, interest rates have come up significantly, 11 interest rate increases over the last 24 months. But the Fed language has indicated sort of hinted that they may be at or nearing their target for a peak. And so annuities offer a longer lock in period on these current interest rates. If you walk into your bank right now, you look up on the bulletin board, you may notice that the rates on the six to 12 month CDs are actually higher than the three and the five year CDs.

That means that the bank is more confident about short term rates than they are long term rates and that you get less if you lock in your money for longer on CDs. Well, annuities, you may be able to take advantage of these higher interest rates, specifically fixed annuities for a longer period of time. But they are not the only ones that benefit the fixed or fixed indexed annuities. They share in the gains of the market. Now, generally and previously, that has never been a very generous share of the gains of the market, but that has gotten more generous. And you you eliminate the downside and you have the opportunity to participate in the upside. There's caps, spreads and participation rates are sort of how these insurance companies and annuities limit how much of the gains of the upside you get. And all of those have gotten more generous, although they are not the best thing since sliced bread.

They are not a solve all. They are never the right place for all of your money. The ability to take away the risk of downside, but participate in the upside is appealing. And then specifically for the purpose of generating income, the cash flow and pay out rates from annuities across the board has improved. And we're even seeing annuities that were issued several years ago that you can go back and sort of renew at much higher rates, regardless of the type.

Even though the Fed has not increased interest rates recently, some experts say more hikes could be on the way. So why would we buy an annuity now if rates could go higher or would you recommend something called annuity laddering? Yeah, well, I think laddering makes sense with kind of any approach if you are locking in for a period of time or even in equities.

We've got dividend reinvestments that basically buys different pieces at different times and spreads the price of those equities. Well, in the fixed world or the interest rate world, you may ladder CDs, so different pieces of money comes due at different times for liquidity purposes. And likewise, with annuities, laddering them will take advantage and lock in different interest rates for different periods of time. Although I may take issue with the notion that interest rates could go significantly higher, we're actually seeing some decreases in interest rates. Not announced by the Fed quite yet, but in the mortgage world, interest rates recently ticked down just a little bit. And some of the rates on fixed annuities also have been announced that they are coming down. That is an anticipation that rates probably have peaked and may be coming down into the future. And that has been more of the language that we feel the Fed has been hinting at, is that they may have peaked in rates. So locking in a rate now for a longer period of time, it may be two sides to the coin. Yes, you've locked in money for a longer period of time before you can access it completely. But you've also locked in these higher interest rates for a longer period of time if they do come down as what has been sort of indicated and expected at some point from what we pay attention to and hear the financial world talking about.

So sometime in 2024, we do expect to begin to see rates ticking downward. Explain a scenario then when an annuity does not make sense. Well, I don't think that any tool is ever right for every job, right? There's an old saying about a hammer and a nail. When all you have is a hammer, every job looks like a nail. But if you have a nail, then a hammer is the right tool. But a screwdriver probably wouldn't be.

If you're trying to put in a screw, then a hammer is probably not the right tool, right? There's certain tools that do certain jobs and an annuity can do a couple of them. And now there are different types of annuities as well.

So you've got to understand which one you're dealing with. Variable annuities have risk. They are basically equities or they're called sub accounts. They're kind of like mutual funds wrapped inside of an annuity wrapper.

I'm going to put that one off the table for a moment because that is a different animal altogether. But other than that, fixed, deferred, fixed indexed annuities, they do not have the risk of the market. So if you're looking for safety protection of principle, they could be a good option. All annuities by definition have the ability to be annuitized, meaning turned into a stream of income. This is a job that an annuity can perform with a different quality than any other asset class, meaning that they can, by design, guarantee that income for that period of time or lifetime. They can generate a guaranteed stream of lifetime income. So whether you want to protect money and get a fixed interest rate for a period of time, or you want no downside but the ability to participate in the upside, or you want a guarantee for how much income your portfolio can generate or a specific dollar amount can generate, because that's the question.

We've got these 401Ks and we don't know how much income we can take from them. The annuity solves that math for you and gives you a minimum. And by the way, has a, right now, much higher cash flow rate than what the financial world has followed for the last 30, 35 years with the 4% rule. We're seeing significantly higher cash flow rates.

So you can take less money and generate more income, or the same amount can generate more income, and that can free up other dollars for you to perform specific roles. But yes, safety of principle, interest and income, those are jobs that an annuity can perform. But again, not the only tool that can do it. You just got to look and see what is right for you and your situation. So Peter, if somebody would like to talk to you to see if annuities are right for them, what's the best way to reach you?

Well, you can reach out and be in touch. And by the way, these are just tools. You really want to know when and where each tool is appropriate. That's part of your plan. So what we do is we help construct the optimized retirement plan.

It'll help us determine where and which tools are appropriate. But if you'd like to talk over annuities or alternative options, give us a call, 919-300-5886, 919-300-5886. You can email me, Peter, at rishanplanning.com. You can visit us online, rishanplanning.com.

It looks like richanplanning.com. And by the way, annuities are not always evil. They are not always the best thing since sliced bread or the best thing. They are never a place for all your money, but they are often mis-sold or oversold. So just make sure that you're getting clarity on what you're considering, that you feel confident. You are getting all the facts, dealing with somebody who is presenting you with the truth of what it is that you are considering. Very important because annuities do tend to be longer term. So it's not what you get in it at on day one, not some upfront bonus.

It's what you plan and when you plan to get out of it. That is the most important factor. Right. Peter, thank you. Absolutely. Always a pleasure.

Everyone, Peter Rishon here. Hope you enjoy the content. As always, make sure that you like, subscribe, share the videos with others that may find this information helpful. And as always, you're welcome to be in touch or to submit questions or comments. You can comment below the video anything that you'd like to see or hear shared on our YouTube channel and in future videos. If you've got a topic that you've been thinking about or is of concern for you financially, be sure to let us know. We'd love to help you by discussing it on the channel. So appreciate the continued views and the likes and the subscribes, the shares, the comments always helpful. We look forward to getting you the information that you need.

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