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May 18, 2021 at 10:49 AM EDT

Waiting for fixed annuity rates to rise doesn't pay - keeping too much in cash puts you behind

MEDFORD, OR / ACCESSWIRE / May 18, 2021 / If you're considering buying a fixed-rate annuity, which acts much like a tax-deferred version of a bank CD, should you wait until rates move higher?

Probably not, says Ken Nuss, CEO of AnnuityAdvantage, an online annuity marketplace at https://www.annuityadvantage.com.

Interest rates are unpredictable

It's impossible to know when or if annuity rates will move up. "The rate you get today may be as good as or better than the one you'll get if you wait," he says.

Second, even if you do luck out and rates rise substantially, you'll almost certainly come out behind. While you're waiting, you'll earn almost nothing in a money market fund or a bank savings account and only a bit more in a "high-yield" account. Depending on how long you wait, it may be nearly impossible to catch up later.

Despite recent declines, fixed-rate annuities still pay more than you might think. As of May 2021, you can earn up to 2.90% a year on a five-year fixed-rate annuity and up to 2.25% on a three-year contract, according to AnnuityAdvantage's online annuity rate database. The top rate for a five-year CD is 1.15% and 0.95% for a three-year CD, according to Bankrate.

Delaying puts you behind

Let's say you put $100,000 into a five-year annuity currently paying 2.90%. It will be worth $115,366 five years from now if you don't take withdrawals and let your interest compound.

Suppose you instead put your money in a money market account yielding 0.20% and wait for higher rates. After two years you'd be behind the annuity by $5,484. To catch up and achieve the same value at the end of five years, you'd need to find a three-year annuity paying 4.72%, which seems highly unlikely, Nuss says.

And this calculation doesn't include the benefit of the annuity's tax deferral.

Don't gamble with your savings

"Playing the interest-rate waiting game is a form of passive gambling, and it's a bet you're almost guaranteed to lose. But unlike Las Vegas, there's no ‘house' taking the money-you never earned the interest in the first place," he says.

It doesn't make financial sense to avoid longer-term fixed annuities when interest earnings can be dramatically improved over cash equivalents.

Consider half now, half later

If you're uncomfortable about locking in today's rates, consider a strategy of half now and half later. Allocate today half of the funds you're considering for fixed-rate annuities. Set aside the remaining half in case rates increase soon, Nuss says.

While fixed annuities have many advantages, including tax deferral and guaranteed principal and interest, the IRS penalizes annuity withdrawals before age 59½. So, don't use an annuity for any money you'll need before 59½.

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate 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.

A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

SOURCE: AnnuityAdvantage

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