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March 13, 2015
In recent years, many people have decided to invest in annuities as part of their financial plan in retirement. Payouts for these investments are typically better than other income-producing investments because those who purchase annuities pool their mortality risk with other annuity purchasers.
Annuities can be a confusing product. Learn about the pros and cons of annuities, how to evaluate annuity features and more…
Do low interest annuity rates have you worried? Use these strategies to help counter lower interest rates.
Annuities can be a great part of your retirement plan, but these investments are still subject to low interest rates. Though there is no perfect way to avoid this, the strategies below can help you counter low interest annuity rates:
1. Ladder purchase dates.
You can ladder annuities just CDs and bonds. By splitting your purchase amount over time, you can potentially take advantage of rising rates in the future. For instance, if you plan on putting $200,000 into an annuity, you could instead invest $50,000 in four annuities over a four-year time period, in which you hopefully catch higher interest rates.
2. Ladder income start dates.
There are certain products such as deferred income annuities, or longevity annuities, which allow you to start income streams at different times. This strategy can help you address inflation in the future. By using products like these, you can set your income streams to start at ages 70, 75, 80 and 85, keeping in mind that the guaranteed payment is higher the older you are.
This strategy can also be combined with laddering purchase dates so that you purchase annuities over a set time period and structure the income streams to payout at ages 70, 75, 80, and 85.
3. Ladder yield and surrender charges.
Fixed-rate annuities, or multiyear guarantee annuities (MYGAs), are a product option that offers a guaranteed annual percentage for a specific time period, and currently, these annuities are offered with as short as three-year surrender-charge time periods. This option allows interest to grow and compound tax-deferred within a non-IRA account.
Annuity specialist and critic, Stan Haithcock recommends “purchasing a three-, four-, and five-year MYGA to hopefully have money coming due as rates are rising. For example, a $300,000 allocation would place $100,000 in a three-, four- and five-year MYGAs.”
4. Be patient, and wait for higher annuity interest rates.
Though it is hard to be patient when it comes to your finances, remember that interest rates will most likely rise in the future, offering higher annuity payouts. You may not experience high payouts in the beginning given the current economic climate, but interest rates will most likely improve. In fact, about a decade ago, annuity rates were nearly double what they currently are. Waiting for rates to rise before buying an annuity can be an effective strategy.
Annuities can be an excellent addition to your retirement plan.
Low interest annuity rates do not have to stop you from including this investment in your retirement plan. By using the strategies above you can effectively counter some of the effects of these low interest rates and be on your way to a successful retirement.
Use an Annuity Calculator to Estimate Costs and Payouts
An Annuity Calculator is a great way for you to find out how much income your money will buy. You can experiment with different time frames, purchase dates, whether or not you want to guarantee a return on your investment, whether or not you want survivor benefits and inflation protection.
Annuities are also a good product to discuss with a financial advisor.
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