Annuities and Greed Don’t Mix

A lot of you have heard me say that this year has been slightly frustrating because of how quickly rates have been changing.  Don’t get me wrong, it has been very satisfying to have better products to work with but it has been a little like chasing my tail at times.  I support everyone who wants to get the best deal possible and a lot of people are still waiting, thinking rates will continue to go higher.

That’s possible but I believe it will turn around and go the other direction one of these days. I honestly hope that rates simply normalize, or remain constant for a while rather than dropping back down.  If the Fed successfully crashes the economy then all bets are off and you may be looking at much lower rates.

I really don’t consider anyone who is waiting to be greedy but it was a nice catchy title.  It does seem, however, I’ve put a lot of energy into this and it feels similar to chasing yield in the stock market.  The similarity there is that lots of people get into or out of the stock market at the wrong time and this is no different.  If you locked in 4% earlier this year, should you have waited to get 5% now?  Sure you can get 5% now but should you wait to see if you can get 6%.

There’s a cost to waiting and everyone needs to understand that.  If you took 4% earlier this year then you’ve already made 2% or more.  If you waited then you lost out on those earnings and it will take you a while to catch up.  4% now versus 5% a year later is a good example.  It would take four years for the higher rate to catch up, not to mention taking it earlier also gets you one year closer to the end of the surrender term.  Those who are waiting are likely not earning zero so it’s not a perfect comparison but I hope you get the idea.

The reason this is important now is because the higher rates get, the less a better rate will be able to offset the cost of waiting.  Convexity is the term used in bond markets to explain the relationship between bond prices and changes in interest rates.  Within an analysis of convexity lies an indicator that tells you why it’s not always best to wait for rates to go higher.  A half percent difference at 4% is a bigger deal than a half percent difference at 5%.  As rates run higher there’s less marginal benefit for waiting to get more.

This is why I say annuities and greed don’t mix.  We have deals available that retirees haven’t been able to secure for more than the past ten years.  My job is getting easier because we can solve just about every problem in retirement with 5% on safe money.  When you find a deal that works then take it.  You may get more but there’s a cost for doing it and at some point those who wait may end up settling for less.

Enjoy the weekend!

Bryan