Potential homebuyers frowned at the Fed’s mid-March quarter-point rate hike because they can expect mortgage rates to continue to climb steadily, as they have since January. Freddie Mac’s weekly research bulletin shows that between Jan. 20 and March 24, rates for 30-year mortgages increased more than 1.1 percentage points. A review by the Mortgage Bankers Association revealed that the higher rates are starting to dampen homebuying, with purchases declining by 6% week over week. We have to wait to see whether slowing sales affect how the Fed adjusts its rates.
On the other hand, many retirees are smiling as interest rates creep up. That’s because if a portion of your income is coming from fixed income investments, you can see those yields rise. And one group of retirees could be particularly happy: those who are planning to include annuity payments as one of their sources of income.
Insurance companies sell income annuities, which are the source of annuity payments. They invest the annuity reserves in mortgages and similar loans. When interest rates rise, the insurance companies offer annuities with higher annuity payments, too. An annuity purchased today will pay more than one bought just a couple of months ago. For example, for a woman age 70 who considered purchasing a life-only income annuity with a $1 million premium, the annuity payments increased by 7% from $67,204 on Dec. 21, 2021, to $71,926 March 22, 2022.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This increase in annuity payments also means you can create more safe income in your plan for retirement income. With both higher and more safe income, you’ll have lots of options on recalibrating your plan.
A Chance at Even Better Annuity Payments Ahead
The Fed says it plans to raise rates several more times over the next year, with one increase expected to be as much as 0.50%. We can expect insurance companies to continue to re-price their income annuities, although not necessarily in lock step.
For every quarter percent Fed rate hike, the income from an annuity might increase by 1.5%. The reason for this multiplier impact is fairly complex and varies by annuity carrier. In its simplest form (which I applied many years ago) the interest rate yield curve on the carrier’s investment was built into the pricing for the life of the annuity and not for a single year.
So, should you wait to buy your annuity until all the predicted Fed hikes have been put in place? Considered in a vacuum, you would do that. But the real world presents variables, such as stock market performance, that should cause you to temper such definite action.
As I wrote during a past stock market dive, ups and downs are unpredictable. Sometimes they’re tied to inflation, interest rates and other economic events; other times a correction might be blamed on pandemics, war and natural disasters. The best response is to create a long-term plan for retirement income that will largely protect your income against negative shocks — but that can also be adjusted to current circumstances.
In other words, maybe the rate hikes will slow the economy and cause a correction in markets. Your increase in income from annuity payments might soften the blow.
Timing Is Everything
Like many others, I advocate that you never try to time the market. In consultation with an adviser, and considering the many possibilities, you might decide you will add annuity payments to your income. At the same time, you might decide to make several purchases spread over a year or more.
A well-prepared plan for retirement income will let you choose from many scenarios that you design. It will also help you choose a mix of income sources to ensure that your risk is spread over many investment types, both safe and a little risky. We want your savings to produce enough income to last the rest of your life and meet your legacy and other goals.
If making all those decisions sounds complicated, I also consistently advise consumers to develop their plans with the help of professionals. At Go2Income, we can provide you with a complimentary personalized plan that delivers both a high starting income and growing lifetime income, as well as long-term savings.
-
Holiday Office Party Taxes: Know Before You GoTax Tips The IRS could tax your gifts from Christmas raffles, Secret Santa, and White Elephant. Here’s how.
-
2025 Tax Reform: Will the SALT Deduction Cap Be Repealed?Tax Deductions Some lawmakers say it’s time to end the $10,000 cap on state and local tax deductions.
-
Three Charitable Giving Strategies for High-Net-Worth IndividualsIf you have $1 million or more saved for retirement, these charitable giving strategies can help you give efficiently and save on taxes.
-
The Wealth-Building Powers of Health Savings Accounts (HSAs)Health savings accounts could be the most underutilized wealth-building tool out there. Here’s who should use them and how to maximize their benefits.
-
Seven Ways to Be an Absolute Jerk as a LawyerHere's what law students need to know about damaging their relationships with other lawyers and judges and running up the bill for clients.
-
One Good Way to Withdraw Retirement Assets (and a Bad One)Don't withdraw retirement assets haphazardly. Managing distributions intentionally can lower your taxes, conserve your wealth and reduce Medicare premiums.
-
What Is Capital Gains Tax Deferral?Spoiler alert: It's the secret weapon of savvy real estate investors. Here's how it works and details about the tools you need to do it.
-
Don't Leave Your Heirs an IRA Tax BombYour traditional IRA has served you well, but when your heirs inherit it, watch out. Consider some of these strategies to minimize their tax burdens.
-
Five Ways to Maximize Your End-of-Year PhilanthropyTo do the most good, pick the right charity, be smart about how you donate and consider giving something just as valuable as money: your time.
-
Three Options for Retirees with an Old (Forgotten) AnnuityDid you buy an annuity in the 2000s? If it’s been out of sight and out of mind since then, it's time to dust it off and start making it pay for your retirement.
