After a record year for low interest rates, you are probably telling clients to wait until rates increase. Even in a low interest-rate environment, an annuity can be a good choice for clients. Of course, the higher the rate, the better. However, rates have been low for quite some time and clients may be missing the opportunity to increase their savings by waiting for a higher interest rate.
Since 2008, interest rates have been relatively low, often for a prolonged length of time. In 2020, the pandemic did not help things either. The current five-year guaranteed fixed annuity rate offered by a highly rated carrier is 2.50%, whereas in 2006 we saw rates as high as 6% guaranteed for six years. This goes to show that interest rates are relative— truly dependent in that specific moment of time.
But even in a lower interest rate environment, compounded growth and tax deferral can grow savings faster for your clients than you may think. If someone puts $50,000 into a five-year guaranteed annuity paying 2.05%, that person would be guaranteed $55,339 at the end of five years, minus any withdrawals taken.
By waiting one year before buying an annuity, that $50,000 would have to earn 2.57% annually for four years to catch up with the older annuity’s value of $55,339. And by waiting two years before buying the annuity, that $50,000 would have to earn 3.44% annually for three years to achieve the guaranteed $55,339. Example calculations like these can help demonstrate that while interest rates are a determining factor in growth, they should not be the only one.
While it is normal for people to want the best return, they will only continue to miss out on growing their savings the longer they wait to decide. Clients consider fixed annuities because they are looking for safety and guarantees. No matter what the stock market does, clients will know exactly what to expect from their annuity by the end of their investment period.
Ultimately, fixed annuities are safe money products. Regardless of what the stock market may or may not do, their money is guaranteed for a fixed period of time of their choosing. Investing now means making the money work for the individual now. Rather than sitting in a checking or savings account, or another low-yield option, annuities will grow, even in a low-interest rate environment.
Rates have been low for quite some time and yet people have been, and still are, earning. While we continue to navigate the pandemic and the economy slowly begins to build back up, interest rates are likely to remain low. Give us a call for current rates to provide your clients a framework around how savings grow over time, along with the security of knowing their money is guaranteed.