How Will Lower Rates Affect Annuities?
For the past year or so the Federal Reserve has been steadily increasing rates at every meeting. Response from consumer product rates was similar as we saw modest rate increases in all types of financial vehicles. Mortgages may be a touch more expensive but options for conservative savings gave people better opportunities for safe income and growth in retirement plans.
Increasing rates gave people higher payouts on income-producing products and more growth for conservative investors who simply want to protect assets.
With widespread predictions of a recession coming in the next year, the Fed has paused rate increases and is now suggesting rates may be cut to keep the economy moving forward. If that happens a market correction could be in the works and options for safe money are going back to the point where it will be hard to find something appealing.
My career has spanned more than 16 years and rates have been decreasing during most of that time period. In fact rates have been on the decline since the peak of the late 80s and have only risen in a meaningful way over the last 18 months or so.
As long as I’ve been watching, all interest-based assets paid lower and lower rates giving retirees fewer and fewer options. Over the past year when rates started to rise a bit that all changed. All assets improved in yield and everything including cash accounts, CDs, bonds and even annuities seemed to offer improving potential.
Those who acted at the right time were able to lock into opportunity that hasn’t been available for six or seven years. It may be nothing like things were 15-20 years ago but even a few years can be a long time to wait if you’re not earning much.
Over the years, low rates have caused lots of people to delay commitments on long-term plans. I’ve heard it more times than I can count. “Inflation is going to go crazy so I’m waiting for higher rates.” Since higher rates have been here many people have continued to wait thinking more is coming. It would be nice to have a crystal ball but then I wouldn’t spend my time writing this newsletter.
So what happens if rates do in fact drop? Well, rates didn’t come up a whole lot so there isn’t as much room for decline as there has been in past recessions but the higher benefits we’ve seen recently will go away. Income payouts will be decreased as well as growth potential on all safe assets.
In approximate numbers, the S&P 500 is up 15% or more since its low point back in December. That’s back when I wrote the article titled “Don’t Make Decisions after One Bad Day in the Market.” While most salesman were using the market turmoil to urge people to buy annuities I tried to remind everyone that short-term events should not dictate long-term planning.
Economic indicators that should help with long-term planning decisions reveal themselves over periods of time. So I’m writing this to remind everyone that things aren’t so bad right now. Yields have been good for market investors and current rates offer reasonable opportunity for anyone who is nearing or in retirement. It’s a much better scenario than waiting until the market corrects and rates drop.
Annuities still offer potential and guarantees that are better than anything we’ve seen for several years. It doesn’t mean you have to jump on a major commitment but it’s a good time to think about your goals and explore options to achieve them.
I listen to a lot of market commentary and right now my instincts side with those who say the bull market still has legs, although it may not be long before that changes. I’m more concerned with the interest rate side of things and this time the two may go hand in hand. High market values and reasonable options for safety are a good thing. It’s much better than the alternative so now is as good a time as ever.
Call, email or make an appointment below if you’d like to revisit any of the ideas I’ve shared.
All my best,