ThinkAdvisor
Should Annuity Buyers Time the Market?
What You Need to Know
- In market terms, there's no good or bad time to buy an annuity, but certain factors can affect payouts.
- While some younger investors might consider waiting for higher interest rates, that plan might backfire.
- Fixed indexed and variable annuities offer market exposure with varying levels of protection from volatility.
From an economic perspective, the year ahead is full of promise — and potential peril. Will the pandemic ease? Inflation lessen? Interest rates rise?
As bond yields remain low, the demand for annuities and other sources of predictable retirement income is surging. Advisory clients interested in annuities may wonder if they need to consider factors like interest rates and the stock market at the time they annuitize.
But while the economy and market movements have some effect on annuity performance, the most important factor is your client’s individual situation, financial planners and annuity experts say.
How to Decide When to Buy an Annuity
“There are many considerations in whether or not to purchase an annuity,” says Winnie Sun, managing partner at Sun Group Wealth Partners in Irvine, California. “First, ask yourself what you’re trying to achieve.”
In general, annuities are insurance contracts that are particularly appropriate for risk-averse clients and/or those seeking guaranteed retirement income, says Russ Hill, chairman and CEO of Halbert Hargrove in Long Beach, California.
Those with a large pension, say, may not need extra income guarantees. But “for your average clients who will be drawing retirement income from their portfolio, an annuity can be an extremely powerful tool to efficiently generate that income,” says Tim Rembowski, a vice president at DPL Financial Partners in Louisville, Kentucky.
Annuities are “not trading opportunities,” says Michael Zmistowski at Financial Planning Advisors in Tampa, Florida. “There is no good or bad time” to buy one. Yet certain economic and market conditions can affect their performance.
Fixed Annuity Investing and Low Interest Rates
Low interest rates, for example, can lower payout rates of fixed annuities. So now might “not be the best time,” says Christopher Van Buren at LVW Advisors in Pittsford, New York — unless, he adds, “you compare them to CDs, money markets or Treasurys.”
If you’re relatively young, “it might make sense to hold off” before locking in a rate, says David Blanchett, head of retirement research at PGIM DC Solutions in Lexington, Kentucky.
Waiting for higher interest rates, however, might not make sense. “When will you know that rates have risen as much as they’re going to?” asks Kimberly Foss, president of Empyrion Wealth Management in Roseville, California.
Wade Pfau of The American College of Financial Services in King of Prussia, Pennsylvania, and founder of RetirementResearcher.com, concurs. “If one knew for sure that interest rates were about to rise, then yes,” he says, waiting might make sense. “… But for people who are already retired, I don’t necessarily think it’s worth waiting.”
Mortality Credits
In fact, waiting might backfire. Annuities rely on mortality credits (sometimes called “risk pooling”), which calculate each annuitant’s life expectancy. The older you are when you buy, the lower your likely payout.