I just spent the weekend in the Florida Keys to celebrate the birthday of this great country of ours with a few friends. One of my friends is in the process of buying a home and she was dealing with the recent spike in interest rates. She spent a good chunk of her holiday weekend stressing about whether she had to lock in the rates before the jobs report came out on Friday. If you are looking to purchase a home and you are going to have a mortgage, it’s fairly obvious what you need to do if you fear that rates are going up, but what about if you are an annuity buyer? Should you wait? And if so, for how long? This is not as easy a question to answer, and the answer may be different depending on your situation.
The first thing you need to look at is the cost of waiting. Let’s assume you could buy a 5 year MYGA (Multi-Year Guaranteed Annuity) with a 2% rate of return (actually, there are products with rates in the mid 3% right now), but for an example we’ll assume 2%. A 50k investment would be worth $55,204 at the end of five years, assuming no withdrawals. If you waited just one year before buying the annuity, you would have to earn 2.51% annually for four years to catch up with the 2% rate. If you waiting TWO years before buying the annuity,you would have to earn 3.36% annually to achieve the same growth. Hopefully, this puts things in perspective.
The next thing that you need to consider is your time horizon. In the annuity world, any product that is seven years or less is considered a short product. Your surrender charges should be low in these types of products which means if interest rates skyrocket and you needed to get out of the contract it would be fairly easy and not very painful on your pocketbook.
Another thing to think about is whether you are adding an income rider or not. If you are adding an income rider to your contract and the purpose is lifetime income, the actually rates or caps on the underlying annuity are not quite as important. In this case, each year that you wait can significantly affect your income opportunities in the future.
But what if you want your cake and you want to eat it to? The good news is that in the annuity world there are products just for a person like you. Many carriers offer a ROP (Return of Premium) Rider, which allows you to get out of the contract at any time without any penalty to your principle. This is in essence like breaking a CD early, meaning you just give up your interest.
The truth is that there is no right answer here. If you truly believe that interests are going to skyrocket in the next 6-12 months, than I would wait to buy that annuity. That being said, I would be very surprised if Ben Bernanke and company were to raise rates too quickly as it would be detrimental to the economy. If you believe that rates are going to go slightly higher, then chances are the cost of waiting is more expensive than the interest rate increase. I would recommend voicing your concerns on interest rates with your advisor.