There was no meaningful change in annuity pricing as the new month started. A handful of carriers lowered payout rates, but the majority of companies held steady. Typically, deferred income annuity pricing is more sensitive to bond yield changes than immediate annuity pricing, and that’s what we saw this month. The top deferred income annuity price fell about 2% while there was no discernible change to the top immediate annuity rates. And remember, all else equal, waiting to buy will typically reduce payouts for products that you want to start on a specific date or at a specific age.
Rising Interest Rates And Annuities
In the last several months as interest rates have risen and fallen again, we have been fielding more and more questions about the relationship between interest rates and income annuity payout rates.
Rather than feature an article from our blog, we figured we’d highlight some interesting research on the topic from Wade Pfau. Pfau is a Princeton PhD and writes frequently about retirement income. In this article, he explains the relationship between interest rates and annuity pricing.
If you don’t have time to read this article, here’s the punchline: every 100 basis points (equivalent to 1%) of change in the 10 year Treasury yield has historically resulted in a 65 basis points (0.65%) change in annuity payout rates.
The implication for you? Although higher interest rates increase pricing, one thing to consider is how the funds you would use to purchase an income annuity are currently invested. If your funds are currently invested in high-growth assets, like the equity markets, waiting to purchase income could be a wise choice if the funds are earning strong returns and you can reasonably expect they will continue to. However, if your funds are in a cash account every month you wait to purchase also reduces your overall income. That foregone income should then be compared to the potential increase in your monthly income amount.
And remember, it’s hard to predict the market. And at any given time, including now, the chance that long-term bond yields rise from here is basically equivalent to the chance they decline.
If you are interested in more personalized analysis of your situation and how to consider annuity pricing in a rising rate environment, please feel free to reach out to us.