What higher interest rates could mean for annuities

James K. Ault • November 22, 2022

Share this article

As interest rates have continued to rise, they are having a tremendous impact on home mortgages and fixed income investments. In the case of the former, rising rates can mean bigger house payments. In the latter, though, you could generate more growth and/or income.

But what could higher interest rates mean for annuities?

The answer to that really depends on the actual annuity you own. So, it is important that you understand how annuities work and what they can (and cannot) do for you before you purchase one.

The Effect of Higher Interest Rates on Annuities

Different annuities can be affected in different ways when interest rates rise and fall. For instance, fixed annuities – which are insurance contracts that pay out a pre-set guaranteed interest rate – are typically impacted the most.

In this case, if you plan to use the annuity as a retirement income-generating vehicle, you could receive a higher payout. This, in turn, means that you could have more cash flow to use for your essential (and possibly also non-essential) expenses in the future.

Fixed indexed annuities (FIAs) are a type of fixed annuity. While there is a fixed account option available with FIAs, these annuities primarily base their return on the performance of one or more underlying market indexes, such as the S&P 500.

If the index performs well in a given time period (such as a contract month or year), the annuity is credited with a positive return, oftentimes up to a stated maximum. In return for this limited upside, though, if the underlying index(es) perform poorly, there is generally no loss incurred by the account.

Annuities versus Bonds

With rising interest rates affecting both bonds and fixed annuities, it may be difficult to determine which of these financial vehicles is best for you. In doing so, both provide principal protection, and each can provide you with regular income payments.

However, there are several areas where a fixed annuity may still come out on top. These can include:

  • Ongoing payments for life
  • Tax-deferred growth

While bonds may pay a steady stream of interest income, eventually these investments mature. At that time, you may have to reinvest in a new bond if you wish to keep income flowing in. But if rates have dropped in the future, you run the risk of taking a “pay cut.”

On the other hand, if you choose the lifetime income option with an annuity, you can count on a regular income stream to continue for the remainder of your lifetime – regardless of how long that may be.

In addition, deferred annuities (i.e., annuities that do not pay out income right away) allow tax-deferred growth. This means that you don’t have to pay tax on the gains until the time of withdrawal – which could be many years in the future.

Over time, tax-deferred growth can truly accelerate because you can generate interest on the principal, as well as on the previous growth, and on the funds that would have otherwise been paid in taxes.

Tax Deferred versus Fully Taxable Growth (with all other factors being equal)

Is an Annuity Right for You in a Rising Interest Rate Environment?

There are many factors that you should take into consideration before you purchase an annuity. These can include your age, risk tolerance, and time frame until retirement. In addition, if you are leaning towards an annuity to supplement your retirement income, you should also consider other income sources that you may have, such as Social Security and/or an employer-sponsored pension plan.

There are many different types of annuities available in the marketplace today, and they can often have many “moving parts.” With that in mind, it can help if you discuss your options with a specialist in retirement income planning.

< Older Post

 Newer Post >

Recent Posts

Man in blazer opening envelope at a desk, looking at papers, smiling. Bookshelf, laptop, and plant in the background.

Filling in The Gaps in Your Retirement Income

By James K. Ault • December 6, 2022
A retirement income gap represents a shortfall between the income you will need to pay your essential (and possibly some non-essential) expenses in retirement and the amount that you actually have coming in. While you may be able to sustain this pattern for some period of time, you will eventually run out of money. Then […] The post Filling in The Gaps in Your Retirement Income appeared first on James K. Ault – Sooner Retirement.
Couple reviewing paperwork together while using a laptop on a couch in a home.

Why Consider a Reverse Rollover?

By James K. Ault • November 29, 2022
If you have ever left an employer where you had a retirement savings account, you may have “rolled” those funds into a personal IRA. Doing so can allow you to take control over your money, as well as open up a much wider array of investment opportunities. But what about doing the opposite? Many investors […] The post Why Consider a Reverse Rollover? appeared first on James K. Ault – Sooner Retirement.
An older Black man with a gray beard, writing on paper and using a calculator at a table.

How much income will you receive from an annuity?

By James K. Ault • November 15, 2022
There are many different types of annuities available in the marketplace today. These include immediate and deferred, as well as fixed, indexed, and variable. When the payments begin, and how the return is calculated, can depend on these variations. For instance, immediate annuities start to pay out income right away (or within 12 months of […] The post How much income will you receive from an annuity? appeared first on James K. Ault – Sooner Retirement.
Woman with glasses reviews bills at a table with a laptop, phone, and coffee mug.

Just how high could income taxes rise?

By James K. Ault • October 18, 2022
Nobody enjoys paying taxes. This is one of the biggest reasons why pre-tax contributions and tax-deferred growth make traditional retirement accounts so appealing – at least during your working years. But at some point, that money will be taxable upon withdrawal. With that in mind, it is important for you to have a plan in […] The post Just how high could income taxes rise? appeared first on James K. Ault – Sooner Retirement.
Man and woman smiling at a laptop, indoors. Woman has her arm on his shoulder. Coffee and notebooks on table.

Keeping Your Retirement Income on Pace With Future Inflation

By James K. Ault • October 11, 2022
Keeping your retirement income on pace with future inflation can be a significant piece to your overall financial future. Without a strategy in place, you may find your purchasing power diminishing over time – and in some cases, it could be necessary to make tough decisions regarding what, and what not, to purchase. Forgoing a […] The post Keeping Your Retirement Income on Pace With Future Inflation appeared first on James K. Ault – Sooner Retirement.
Man with gray hair sits on couch, looking at laptop, holding notebook and pen. Coffee on table.

Addressing The 3 Most Pressing Retirement Concerns

By James K. Ault • October 4, 2022
Retirement planning can pose a number of challenges. But even if you have successfully reached retirement, there are new hurdles that you may face… three in particular that can have devastating consequences if they are not planned for. With that in mind, addressing the 3 most pressing retirement concerns should be a key component of […] The post Addressing The 3 Most Pressing Retirement Concerns appeared first on James K. Ault – Sooner Retirement.
Smiling older woman with gray hair reads papers at a desk in a home office.

3 key steps to converting savings into a lifetime retirement income stream

By James K. Ault • July 20, 2022
Until just a few decades ago, many retirees could count on retirement income from three primary sources. These included an employer-sponsored defined benefit pension plan, Social Security, and personal savings or investments. Today, however, many companies have done away with the traditional “pension” plan, replacing it with defined contribution plans such as the 401(k). But, while these […] The post 3 key steps to converting savings into a lifetime retirement income stream appeared first on James K. Ault – Sooner Retirement.
Senior couple in kitchen: man kissing woman's cheek, holding wine glasses, preparing food.

What to do with your 401(k) when you retire?

By James K. Ault • July 12, 2022
Knowing that you can count on a set amount of income to arrive throughout your retirement is a key factor in how – and how well – you will live. In many cases, the largest amount of savings that a retiree has is the funds inside of an employer-sponsored retirement program like a 401(k) – […] The post What to do with your 401(k) when you retire? appeared first on James K. Ault – Sooner Retirement.
Woman with curly gray hair, at a conference table, gazing out a window, hand to her chin, laptop open.

What to consider before a Roth IRA conversion

By James K. Ault • July 6, 2022
Roth IRA accounts can offer you a number of benefits – including tax-free income in retirement. This can put you at a significant advantage, given that tax rates are expected to rise in the future – and nobody knows how high they will go! Unfortunately, not everyone qualifies for a Roth IRA, though. So, it […] The post What to consider before a Roth IRA conversion appeared first on James K. Ault – Sooner Retirement.