The stock market has trained everyone to try and “time” any purchase. The obsession of every stock buyer on the planet is to buy at the bottom and sell at the top. But as we all know, that is a tough and almost impossible challenge. That same obsession to find that “sweet spot” or perfect arbitrage moment, unfortunately, carries over to the purchase of annuities.
I always try to explain how you can’t beat the annuity companies. They have big buildings for a reason. When it comes to current annuity rates and how the different product types are priced, you need to know the brutal truth before wasting your time as an annuity analyst. Also, there is no such creature because annuities are contracts. Lawyers analyze contracts!
So “What are the best annuity rates?” is like asking “What’s the best restaurant?” With annuities, there are many different types, so you must be more specific with what you are trying to contractually achieve.
When you are purchasing an annuity for a lifetime income guarantee, you are transferring that longevity risk to the annuity company. They are on the hook to pay regardless of how long you live. That’s the unique benefit proposition that only annuities can provide. You can call it a retirement income monopoly because it is.
Annuities, regardless of type, are contracts issued by life insurance companies. Lifetime income products like Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Income Riders are all primarily priced on your life expectancy(s) at the time the payments start. Interest rates play a secondary role.
That annual payout or monthly payout (your choice) is a combination of return of principal plus interest. The “payout rate” reflects your life expectancy. So, when you see misleading promotions that say you can earn 6.9% on an immediate annuity, that high percentage does NOT yield. It’s the percentage of what will be paid out of the lump sum as well as a snapshot of your life expectancy.
Annuity agents and promoters like to tiptoe around the edges when it comes to facts. They know that people still yearn for “Jimmy Carter yield” levels, so sales pitch riddles are played to get you to sign the contract. You must be smart enough not to fall for that semantic nonsense.
When people ask me, “How much does a $100,000 annuity pay per month?” I always answer with “I need a lot of specific information to be able to answer that question.” The information I need to know is if you want a lifetime income stream or payments for a specific time...or both. If it’s lifetime income you desire, then I would need your date of birth (or dates of birth if you want to set up the payments “Joint Life”), then I would need to know if you want to place a lump sum initial investment into the policy upfront, or have me reverse engineer the quote to solve for a specific monthly dollar amount.
After I’ve obtained all that information, then I can go quote all carriers to find the highest contractual number for your specific situation. So, what is the rate of return on a lifetime income annuity? I don’t know that until you die. Up until that point, it’s a pure transfer of risk.
Not all annuity income streams have to be for life. You can also purchase a contractual income for a specific time. For example, you might need 10 years of monthly payments to fill an income gap. That annuity structure would be a “10 Year Period Certain” contract, and you would determine the income start date at the time of application. Since your life expectancy is NOT part of the pricing, the current interest rate environment drives the pricing of that guaranteed income stream.
With a “20 Year Period Certain” guarantee, you or your beneficiaries are going to receive 20 years of a contractually guaranteed payout. If you die year 3, then your beneficiaries would get 17 years of payments. If you died in year 21, your beneficiaries would not get anything. See how that works?
Period Certain payouts are the most interest-rate sensitive of all annuity income types. The transfer of risk is not your life expectancy but for that defined period that you choose.
There is an insurance product that is the annuity industry’s version of a CD (Certificate of Deposit). It’s called a Multi-Year Guarantee Annuity (MYGA). MYGAs and CDs pretty much work the same way. They both guarantee an annual interest rate (fixed rate) for a specific time that you choose. They both have no annual fees and no moving parts and pay a low built-in commission to the selling agent.
The only distinct difference between MYGAs and CDs is how the interest is taxed in a non-IRA (i.e. non-qualified account). MYGA interest grows tax-deferred. CD interest in a non-IRA account is taxed annually. That doesn’t make MYGAs better than CDs, but the interest taxation issue could determine where you place your money. Both have surrender charges during the specific duration (that you choose), and market volatility is never an issue with these fixed strategies.
With MYGAs, current interest rates play the primary role in pricing. However, it is a competitive marketplace and carriers bid on your business. This is the reason you have to shop all carriers and find an objective fixed annuity calculator that will provide the highest yields available for your specific state of residence.
Annuity purchasers should always start the fixed annuity buying process by finding the highest contractual guarantee, annuity quote, or payout rate available by shopping all carriers. You need to use an annuity calculator that can access every annuity company to find the highest contractual guarantee for your specific situation.
Once you have found those contractual numbers, then you need to do your research on the claims-paying ability of the carrier. My recommendation is to use the COMDEX ranking system that has an easy to understand 1 to 100 scoring system that integrates the 4 major rating services (AM Best, S&P, Moody’s, Fitch).
One last dollop of advice. Don’t try and time any annuity purchases. It’s like trying to nail jello to the wall. Not likely. Find the contractual number that fits your goal with a carrier you feel comfortable with, and then transfer that risk.