Broker Check

Will Annuities Play a Larger Role in a Rising Rate Environment?

| February 24, 2017
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What is the only investment product that can contractually guarantee lifetime income payments that you can never outlive?

 

I’ll give you a hint; it’s that awful “A” word. That’s right, I’m talking about annuities. For some unknown reason, the annuity industry has never really successfully communicated to the end consumer what I would consider is the main reason to buy an annuity in the first place: guaranteed lifetime income.

 

For most retirees, income for life is a big deal, and it’s the reason Social Security (the U.S.’s best-known annuity structure with inflation benefits), is “untouchable” from a political standpoint. So how would a rising interest rate environment impact those lifetime income payments from annuities in the future?

 

Regardless of what annuity income benefit chosen, lifetime income payments are simply a combination of return of principal plus earnings. And even though the annuitant’s life expectancy at the time payments start is the primary mechanism for pricing an annuity, interest rates do play a secondary role. Common sense will tell you that if interest rates do begin to rise, then the future annuity guarantees and benefits will likely begin to rise as well.  

 

So if President Trump is able to deliver on his economic and pro-business promises and give the Federal Reserve solid reasons to continue raising rates from historically low levels, it’s likely we’ll begin to see a positive impact on annuity income benefits, making them more attractive to hold as part of a retirement portfolio.  If the economy continues to improve from here, and the average consumer is able to plan more fully for retirement, investments that provide more income security are bound to become more popular. This is where annuities may play a bigger role in the coming years, as they provide guarantees a lifetime income stream and solve the problem of increasing longevity risk. The annuity facet of the financial industry will certainly be one to keep an eye on as we move through the first year of Trump’s administration.

 

At SRQ Wealth, we attempt to identify and rectify financial “blind spots” that may have dramatic impacts on the success of one’s retirement forecast. We encourage our readers to reach out to one of our advisors if they have questions or concerns over their own potential longevity risks in retirement.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

Annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.

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