Should I Purchase an Annuity Today?
In the summer of 2020, I wrote a blog post about why we decided to purchase two annuities. Recently, a friend asked me if we were glad we made the purchases and if I thought purchasing an annuity today was still a good idea. The answer, as with everything in financial planning is, “it depends.”
Everyone’s situation in retirement is different. Some things that may be good for one person, may not be for another. You can click here to read my blog post from July 2020 where I provided a detailed explanation as to why I decided that purchasing the two annuities (one each for my wife and myself) was the right thing for us to do. Our main goal was to provide more lifetime income to supplement our social security benefits to help alleviate “Longevity Risk.”
For us the short answer is “Yes,” I am still glad we purchased the annuities in 2020. Now one question someone may have; since interest rates are much higher today, would it have not been better to purchase your annuities today, rather than 3 years ago? No question that the annual payout on income annuities purchased today are higher than 3 years ago.
As an example, the annuities we purchased in 2020, if purchased today, the annual payout would be about 10% higher. However, it would not have helped us if we had delayed our purchases for three years. Why? Because we purchased our annuities for the purpose of receiving income at a certain age. When you purchase a rider on an Equity-Index Annuity (EIA), the income rider accumulates value every year. So, even if we had purchased our annuities today, the annual income payout (at our future chosen ages) would still not be higher than from our original purchase date because the current annuities would have three less years to accumulate value.
One could argue that we could have invested our premiums paid for three years and then had a bigger premium available to purchase the annuities which would provide a higher annual payout. This is certainly possible. And if I had had a crystal ball and knew that the equity markets would be much higher today, that would have been an easy decision. But in the spring/summer of 2020, with the economy locked down, higher equity markets were not a certainty. So, to be sure we did not lose any money, we would have had to invest in fixed income assets. At 1% (or less) annual return on short-term income assets, we might have been able to increase our premiums available for purchase by about 3%-4% over three years. And even then, this is assuming that one knew in 2020 that interest rates would be much higher today than in 2020. Since inflation was not on anyone’s mind back then, much higher interest rates were very unlikely.
Speaking of inflation, that brings me to the one thing to consider that is different from three years ago. In my July 2020 inflation was on no one’s mind. In my blog post back then I wrote that my one hesitation about purchasing the annuities was whether the US started to experience higher inflation on a more permanent basis. Higher inflation would make any annuity payouts worth less every year. And, indeed, inflation did get much higher, which is why interest rates are much higher today.
So, assuming your desire/need for lifetime income is an important part of your retirement financial plan, I believe the decision about whether one should buy an income annuity today should consider more heavily one’s feelings about the future rate of inflation. If, going forward, the country ends up experiencing many years of high inflation, I may end up regretting purchasing the annuities. However, if you feel that the Federal Reserve will get inflation under control going forward, then purchasing an income annuity at this time with higher interest rates may be a good financial move.
If only someone had a crystal ball.
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