The question is, how does the economy affect annuity rates? That's a fundamental question to a very detailed answer because annuities are not all the same. The economy affects annuities differently.
How does the economy affect annuity rates and annuities in general? Well, let's look at a myriad of ways. I used to be with Morgan Stanley, Dean Witter, Paine Webber, and UBS on the stock side in my previous life. The stock market has no use for annuities. Annuities are market-type contracts that primarily solve four things, principal protection, income for life, legacy, and long-term care. Consequently, I created the acronym PILL.
From the economic standpoint, when you're talking about lifetime income, annuities are primarily based price-wise on your life expectancy when you decide to start the payments. Interest rates play a secondary role. How does the economy affect a lifetime income stream, an immediate annuity, a deferred income annuity, a qualified longevity annuity, contract, or an income rider? Well, Interest rates play a secondary role. The primary pricing mechanism for lifetime income is your life expectancy at the time you make the payments, and you're at risk of those changing as well.
Annuity companies aren't just going to sit here and not make money. If their interest rates are low and remain low, I guarantee you; they’re going to look at changing those life expectancy tables so that it projects you to live longer. What does that mean? The payments will be lower because there'll be more of those payments because their projection's saying, "Hey, you're going to live a long time." That's kind of how the economy affects annuities and annuity rates.
Therefore, when people can't get reasonable interest rates, like CD rates or multi guarantee annuity fixed rates, they often gravitate toward the stock market, buy ETFs or mutual funds, etc., to get some return on their money. There’s a risk with that. Anytime rates are low in the annuity world, the stock market will get a bit of a bump.
The reverse is kind of true too. When people are scared to death, and things are happening in the volatile economy or the worldwide market, many people look to protect their money. As I’ve said before, annuities are contracts, and a lot of the fixed annuities will fully protect the principal if you structure them that way. With the 10,000 baby boomers hitting 65 years old every day, many of them are looking for a contractual guarantee. Unfortunately, a lot of annuities are sold with fear in mind. I tell people all the time if you're looking for stock market-type returns, perfect return scenarios, never buy an annuity.
As I always say in the annuity world, there's no perfect answer, just bad sales pitches. A great example of that was a person who called me the other day, and they were looking at a lifetime income stream type product. Their comment was, "I'm going to wait till interest rates go up until I buy that annuity," If you're waiting to buy a lifetime income stream annuity, then you’re going to have to factor in the payments that you missed while you were waiting. However, that doesn't mean you have to buy one right now but what it does mean is you cannot time the purchase. There's never a sweet spot that we sometimes find in stocks and mutual funds, bonds, et cetera. If you're trying to time annuities, then you're making apples to oranges comparison to how you look at investments and how you look at annuities. They're entirely different. You cannot compare the two because one's a contract, the annuity side, and the other is you shouldering the risk for that investment. That doesn't make annuities better than the stock market or the stock market better than annuities. It comes down to your risk tolerance and what you're trying to solve.
Remember this, when you're looking at an annuity of any type, ask and answer these two questions. Number one, what do you want the money to do contractually? And when do you want those contractual guarantees to start? Now from those two answers, I can customize strategies for your specific situation utilizing these contracts.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.