The one thing nearly every professional financial advisor will agree upon, no matter what their specific approach, is that it’s very difficult to time the stock market. Money managers who are celebrated as stars one year — because they spotted something the rest of us didn’t see – may be bums the next.
The same truth applies to the more mundane world of interest rates. Though interest rates don’t tend to soar and crash with the drama of the stock market, the only sure way to detect trends is with a rearview mirror.
So when a 65-year-old woman visited Go2Income to calculate how much money her savings could provide, she remained hesitant. She knew how much income a QLAC she was considering would pay at age 85, but she wondered if she could get more income by delaying her investment in the hopes that interest rates would rise and insurance companies would offer better QLAC rates.
A hedge against rate increases
Insurance companies use many variables to price income annuities, including long-term interest rates based on 10-year and 20-year bonds. Although long-term interest rates go up and down, of course, they are much more stable than the short-term rate set by the Federal Reserve.
So if you’re waiting for interest rates to affect the price of an income annuity, you could be waiting a long time.
Even so, buyers of income annuities who want to bet on rising interest rates can consider purchasing their income annuities in several smaller amounts. With $200,000 in savings, you could spread out interest rate risk by investing in four income annuities of $50,000 over eight years.
This approach also reduces what I call the “Cost of Waiting.” If you decide to invest only when you think interest rates are highest, you lose the benefit of annual payments or compounding interest for all the years you have been analyzing the market. The loss could add up to tens of thousands of dollars.
What about living on interest?
There was a time when retirees over the past several years could reasonably plan to live off interest income of 4% to 5% earned from the savings in their money market funds, CDs and bank accounts. But monetary policies of the last decade have demonstrated the shortcomings of those plans, as rates returned from such accounts have dropped to below 1% and retirees are forced to consider dipping into principal to cover living expenses.
One way savings can produce income, without worrying about running out of money, is through an income annuity.
Consider that $100,000 invested in a money market today might earn $1,000 a year. With that same amount, however, a 72-year-old man who bought an income annuity could earn around $7,500 a year for the rest of his life. He could design the income annuity to continue payments to his spouse or allow his children to inherit the principal too. Although that would lower the annual payment, it would still be significantly higher than staying with the money market account.
The Bottom Line
As I always recommend to future and present retirees who contemplate the many investment choices facing them, make the decision that is right for you. But keep in mind that if you decide an income annuity would be a good fit for your retirement plan, don’t wait for anyone to tell you which direction interest rates will go.
Visit Go2Income to analyze your best opportunities to maximize your savings.
And to learn more about income annuities, read a blog I wrote last year about planning beyond averages.