Last week, we explored how interest rates impact savings accounts, CDs, and bonds. Today, we’re taking a deeper dive into annuities—what they’re used for, how different types work, and how they’re affected by interest rates. By the end, you’ll see how annuities can support different retirement strategies, whether you’re looking for income or stability.

What Are Annuities and Why Are They Used in Retirement?

Annuities are financial products provided by insurance companies, designed to provide a reliable income stream in retirement or offer market downside protection. People typically choose annuities for several reasons:

• Guaranteed Income: Annuities offer the option for predictable, lifetime income, which can provide a stable financial foundation in retirement.
• Downside Protection: Certain annuities, like fixed and fixed indexed annuities (FIAs), offer market protection, making them attractive to those looking to avoid losses while still seeking modest growth.
• Tax-Deferred Growth: Most annuities grow tax-deferred, meaning you only pay taxes when you start receiving payments or withdraw funds, which can benefit long-term growth.

Some individuals may purchase annuities specifically for their downside protection features. Fixed and FIAs, for instance, can act as a bond portfolio alternative, offering predictable growth without exposure to market losses. While fixed annuities and FIAs typically have lower growth potential than equities, they appeal to those who prioritize safety over high returns.

Types of Annuities and Their Characteristics

Let’s explore the main types of annuities, their unique characteristics, and how they respond to changing interest rates.

• Fixed Annuities
• Fixed Indexed Annuities (FIAs)
• Variable Annuities

Key Feature Across All Annuities: Guaranteed Income Option

A valuable feature of all annuities is their ability to provide guaranteed income for life. If the annuity owner decides to convert their annuity into an income stream, they receive monthly payments they can never outlive. This feature makes annuities particularly appealing for those worried about longevity risk, as they offer the option to trade accumulated value for a lifetime income.

How Interest Rates Affect Annuities

Understanding how interest rates impact annuities can help determine the best time to purchase these products:

• When Rates Are High: New fixed and indexed annuities generally offer better payout rates or growth opportunities, making them more attractive for steady income or secure accumulation.
• When Rates Are Low: Lower rates reduce the growth and payout potential of new fixed and indexed annuities. In these times, deferred annuities may allow you to wait for rates to rise before starting payouts.

Strategies to Consider with Annuities in Changing Rate Environments

Here are a few strategies to help you make the most of annuities, regardless of the interest rate environment:

1. Evaluate Existing Fixed and Indexed Annuities: If you have annuities from a high-rate period, they may be valuable in today’s low-rate environment. Review these contracts to assess how they fit into your retirement strategy.
2. Consider Deferred Annuities: If rates are currently low and you don’t need immediate income, deferring an annuity purchase allows you to wait for potential rate increases. This approach can lead to higher future payouts.
3. Balance with Growth-Focused Investments: While annuities provide safety and predictability, balancing them with growth-oriented assets like dividend stocks or real estate can help mitigate the impact of low rates while ensuring income stability.

Why This Matters

Annuities can play an important role in retirement planning, providing both income stability and protection from market losses. By understanding the unique characteristics of each annuity type and how interest rates influence them, you can make more informed decisions about how annuities can support your long-term goals.

Next Week

We’ll explore Interest Rates and the Housing Market, discussing how rate changes influence mortgages, refinancing, and home affordability.

Warmly,

Jeff Perry

Partner, Quest Commonwealth

Co-Host of “Safe Money Mindset” on WXYZ-TV ABC Detroit

Author of “Safe Money Mindset” – Available on Amazon or DISCOUNTED HERE

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