Should You Wait to Buy an Annuity?
Many retirees are turning to annuities to provide income and/or growth with no downside risk. Let’s forget for the moment the costs and other problems associated with variable annuities in particular. The question I want to briefly address is – assuming that an annuity is part of your retirement planning – whether you should wait to purchase one.
For example, one large insurer – MetLife – sells variable annuities with a lifetime income rider promising a guaranteed withdrawal rate. For many of those annuities, the withdrawal rate was recently lowered from 5.5% to 5.0%. You may be thinking that 5.0% still sounds darn good today. Don’t forget that this is not truly comparable to an interest rate on money deposits because (a) your principal may not be available to you and (b) you are paying substantial fees just to have this income rider in place.
Fixed income annuities are also being affected. The payout rates for immediate annuities have fallen by as much as 11% from 2010.
As a result, sales of variable and fixed annuities have dropped substantially from a year ago.
This brings me to the point of this post. It may be in your best interest to delay the purchase of an annuity for at least a year. Hopefully after the election, our government will get its act together and take the actions necessary to stabilize the markets and restore confidence in the economy. If, as a result, the economy begins to grow at a normal rate, the Fed will allow interest rates to rise. Annuity sellers will take note of this, lower their risk projections, and once again begin offering more competitive and attractive rates to retirees.
Another option is to build an annuity ladder buy purchasing a series of smaller annuities staggered over time.
Here is a link to an article that discusses the recent trends in annuity payouts: How annuity benefits are shrinking
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