Fixed-rate annuities today usually pay higher rates than other fixed-rate instruments such as CDs and investment-grade bonds. As with CDs and bonds, you’ll get a higher interest rate if you’re willing to tie up your money for a longer period.
On the one hand “going long” will produce more current income. Some people are comfortable with that. On the other, going short gives you flexibility. If interest rates improve in the interim, you’ll be able to get a better rate once the guarantee period is over.
What makes the most sense?
“For people with enough money to spread among different annuities, I suggest laddering guarantee terms,” says Ken Nuss, CEO of AnnuityAdvantage, an online annuity marketplace (https://www.annuityadvantage.com/).
Because no one knows for sure which direction interest rates are headed in the future, laddering makes the most sense. “It gives you both good current income and future flexibility,” he says.
With the yield curve flatting, Nuss recommends laddering annuities from three to five years.
Significant interest-rate bump at three-years
There is a significant interest-rate bump when comparing two- and three-year terms. For example, today you can earn 2.10% on a two-year annuity from an insurer rated A- for financial strength by A.M. Best.
With a three-year MYGA, you can earn 2.55% from that same A- rated company. That’s 21% more interest. Unless you’ll need all that money two years from now, it’s probably worth going for an additional year, Nuss says.
Three years from now, you’ll be able to roll the proceeds tax-free, via a 1035 exchange, into any other annuity that looks most attractive then. Maybe rates will be higher.
While a four-year annuity is an option too, five years is a sweet spot. Even if you’re willing to tie up your money longer, you won’t get much more interest with a seven- or ten-year contract right now.
For instance, if you’re willing to go with a B++ rated company, you can get 3.27% on a five-year contract.
If you prefer an A-rated company, you can earn 3.10 % on a five-year annuity and 3.25% for seven years with that company, Nuss says.
IRA season: consider fixed annuities
Besides being useful for nonqualified savings, fixed annuities also work well for IRAs. And the same laddering approach works.
Between the ages of 59 ½ and 72, you may take taxable interest withdrawals from a traditional IRA annuity or you can let the interest compound and defer taxes. At 72, you must begin taking required minimum distributions (RMDs).
If you’re already taking RMDs or soon will be, look for an annuity that lets you take out your RMDs without penalty. Many issuers have that feature.
If you have all of your IRA in equities or even long-term bonds, you may be forced to make an untimely withdrawal when the stock or bond market is down. Whether you choose a three- or five-year or other term annuity, you’ll be assured that you’ll have the guaranteed withdrawals to pay your RMD.
Annuities have various pros and cons and tax effects. Talk to a qualified independent annuity agent who represents multiple insurers before committing, Nuss advises.
Website for free fixed-rate comparisons
A free annuity comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly for several leading financial websites
Contact: Henry Stimpson, Stimpson Communications