Will Annuity Rates Go Up in 2023?
Plenty of people held back from an annuity purchase hoping for rates to continue to climb. We saw the top of the market back in November and it has pulled back consistently since then. Annuity rates have leveled off and dropped slightly to begin the year and still, people are waiting for rates to rise before making a commitment. Do yourself a favor, take a deeper look, and forget about whatever your neighbor or coworker says. Will annuity rates go up in 2023?
My guess is, probably not. Anyone who doesn’t like the long, drawn-out answers can just leave right now.
The Fed actions
The Fed does want to add a couple more rate increases but that doesn’t directly relate to changes in annuity rates. No matter how many times I say it, people still believe that the Fed’s actions will translate to a better deal for the insurance company. The Fed only controls the federal funds’ rates, which is the rate charged between banks for overnight loans.
long-term rates is where your focus should be.
Short-term rates are most dramatically affected by Fed actions and that’s why we’ve seen such aggressive moves on stuff like three-month treasuries and six-month CDs. It’s a lot easier to project markets and the economy over the short run than in the long run. Annuities are mostly based on long-term rates so that’s where your focus should be. I’ve always watched the ten-year treasury as a basic indicator of where annuity rates are headed and that’s ok but a little simplistic as well.
Credit spreads play a part as well
Credit spreads, which is the difference between the treasury rate and a bond with similar maturity, play a part as well and give an indication of the profitability of an insurance company. An increasing spread can offset falling rates to some extent and that’s one of the reasons why annuity rates have settled just a bit, while the ten-year treasury is down almost 1% in the past few months. You want the insurance company you choose to make money, otherwise, you’ve got a bum annuity.
Inflation and the Fed
So, will annuity rates rise in 2023? Let’s first recall why the Fed is raising rates in the first place: inflation. It was out of control a year ago. Easy money and stimulus funds flooded the economy with cash. It’s been happening for a long time but the events of 2020 didn’t make things any better. Home sales surged along with building costs, the labor market is tight with wages rising, and supply chain issues have not yet eased so everything costs more today. Increased borrowing rates slow it all down so the Fed has been pushing them higher.
…don’t sit around hoping for rates to rise because I don’t think it’s going to happen.
Inflation started to ease toward the end of last year so the Fed slowed things down with only modest increases. The January report was the lowest we’ve had in a year but it’s still at 6.5%. The market has remained strong because investors are optimistic the Fed will continue to slow things down or even stop. But then we got a really strong jobs report so we’ve been told rates need to go higher. It’s rather more than a theory at this point that the Fed’s ultimate goal is to induce a recession. They’ve essentially been saying as much for the past year and it looks like they are serious.
I’ve been saying for a year that this thing is going to swing in the other direction. We are seeing the first signs of it now. If you don’t believe me, then how did the Fed raise rates at every meeting in the last three months while annuity rates dropped? The most likely scenario, according to many analysts, is that the Fed will do too much. If so, that will push us into a recession which will have much more of an impact on annuity rates. We are two-quarters away from it now so we’ll all have to wait and see. But don’t sit around hoping for rates to rise because I don’t think it’s going to happen.
The best-case scenario is that we’ll see things level off for a while so this isn’t my only chance to convince you that there are some really good deals available. I listened to a webinar last week, where the chief investment officer of a major insurance company gave us his economic outlook for the year. While I have been selling annuities for the past 20 years, he has been managing insurance company assets so I think he knows what he’s doing. His forecast for 2023 is that the ten-year treasury will continue to settle below 3% and could end the year closer to 2%. That puts us back near 2015 levels and I didn’t like what I had to work with back then.
Will annuity rates go up in 2023? I don’t think so. We’ve seen the best market for annuities that have existed in the past 15 years. Now is a great time to secure retirement income or just protect some assets and lock in some really nice yield potential. Those who are just starting to look at annuities may not understand completely and waiting may mean that they learn the hard way. I hope I’m wrong but you guys know that I always err on the side of caution.
Thanks for reading!