Immediate annuity payout rates were down this month for most insurers as the yield on the 10-Year Treasury, which is a good proxy for annuity pricing, fell in November. Deferred Income Annuity pricing remained constant this month.
A Financial Analysis of Buying vs. Waiting for DIAs
Many of you on this newsletter are faced with the same dilemma. You know you want guaranteed income in retirement but don’t know when the right time to buy is. It’s the #1 question our team gets asked.
If we spend our time trying to answer it from a how-annuity-rates-move perspective, it’s just impossible to answer. Trying to optimize based on annuity rates is like trying to time the market. And we know through the over-performance of passive funds as compared to active funds that this strategy doesn’t work.
The focus on interest rates in this analysis makes easy to forget another key factor driving annuity rates: your age. Holding all else constant, the older you are when you purchase, the more it’ll cost you to get the same amount of income starting in the same year.
Let’s take Curtis’ situation as an example. Curtis is a 55-year-old male looking for $1,000 per month starting when he’s 70. He wants a cash refund and he wants an A++ rating. If he buys a DIA right now, it’ll cost him $101,621. Assuming no change in rates, every year he waits, his premium will increase. Next year it’ll cost him an extra $5,000. If he waits until he’s 70 and gets a SPIA, it’ll be an extra $87,000.
To make each of these options equivalent, his invested assets that will go towards the annuity purchase will need to grow each year. In the chart below, his premiums are shown as blue bars, and the necessary annual effective return on his portfolio to make buying in that year financially equivalent to buying now are shown as orange dots.
The required returns are messy because of the variety and complication of the assumptions that go into the insurance company models, but, on average, the answer is that his portfolio needs to grow by 4.3% per year for it to make sense for him to wait.
How should you apply what we learn from Curtis’ analysis to yourself (if your situation looks like Curtis’) assuming you don’t have a position on the direction of annuity rates:
- If you know your assets will grow by 4.3% per year, wait.
- If you don’t believe your assets will grow by 4.3% per year, buy.
- If you’re not sure, take the “passively-managed” approach and split your annuity purchases evenly across the years from now until your desired income start.
Was this helpful to you? If you’d like to see this analysis for your own situation, just ask!