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Fixed-Annuity Sales Rise Even Though Rates Are Rock-Bottom
OK, the 2% is very good for a safe fixed income investment right now. Better than CDs and Treasuries. But.....they lock you in for some years into the future, and you have to pay surrender charges to get out. So if you don't like the interest rate they pay 2-3 years from now.....too bad, you're locked in, with no way out except to pay the exit fee, which is probably very substantial. At times, fixed annuities beat the interest rates offered on CDs. At other times, CDs beat the interest rates offered on fixed income annuities.
So if in 2-3 years, CDs are beating the pants off fixed annuities wrt interest rates they pay......sorry Charlie.....out of luck.
The insurance company holds all the cards.
I think the Immediate Annuities, e.g., single premium immediate annuities, potentially offer something worthwhile to the retiree to insure against outliving your nest egg; to guarantee that you will have a monthly income for the rest of your life regardless of how long you live; but even there, one must study all the details carefully. Annuities are not simple products, and require due diligence.
@rjb112, you are absolutely correct about the complexity of annuities.
The trick is to find the right annuity (if one exists) for one's specific circumstances. You cannot say one is better than another in vacuum. SPIA, for example, isn't for everybody either and is actually worse in a low interest rate environment compared to indexed fixed annuities. Unless you want to offload longevity risk and take on interest rate and inflation risk as the right thing for your circumstance. Each is targeted at a different need and provide different compromises.
The thing about annuities is that they are insurance products and as such are designed to off load some kind of risk for a price. So, comparing them to any other investment that doesn't take over that risk is meaningless. And because of that cost, they always return less than such investments.
Unfortunately, they are marketed to the very people who don't understand this and sold by an army of agents that on the average make Realtors and used car salesmen look like angels.
Comments
So if in 2-3 years, CDs are beating the pants off fixed annuities wrt interest rates they pay......sorry Charlie.....out of luck.
The insurance company holds all the cards.
I think the Immediate Annuities, e.g., single premium immediate annuities, potentially offer something worthwhile to the retiree to insure against outliving your nest egg; to guarantee that you will have a monthly income for the rest of your life regardless of how long you live; but even there, one must study all the details carefully. Annuities are not simple products, and require due diligence.
The trick is to find the right annuity (if one exists) for one's specific circumstances. You cannot say one is better than another in vacuum. SPIA, for example, isn't for everybody either and is actually worse in a low interest rate environment compared to indexed fixed annuities. Unless you want to offload longevity risk and take on interest rate and inflation risk as the right thing for your circumstance. Each is targeted at a different need and provide different compromises.
The thing about annuities is that they are insurance products and as such are designed to off load some kind of risk for a price. So, comparing them to any other investment that doesn't take over that risk is meaningless. And because of that cost, they always return less than such investments.
Unfortunately, they are marketed to the very people who don't understand this and sold by an army of agents that on the average make Realtors and used car salesmen look like angels.