It’s a tried and true strategy to protect client liquidity in a low rate environment in order to ensure the client is well positioned to seize growth opportunities when they finally begin to appear again, and to prevent losses from lock-in on investment vehicles with poor pay-outs and sluggish break-even surrender dates. Because this strategy has proven historically sound, many investment advisors urge clients to avoid investment products such as Certificates of Deposit (CDs) and multi-year guarantee annuities (MYGA). But these are not ordinary times and the low rate environment is lasting too long for cash to lay fallow, earning nothing for several years.
While top Federal Reserve officials differ on whether the U.S. central bank should take even more aggressive action to spur the economy, the Fed guidance says rates will stay extremely low until at least late 2014. Meanwhile, Chicago Fed President Charles Evans told a field of reporters that he expects inflation will also remain low, under 2 percent actually, for several years to come. His prediction matches the Fed’s formal inflation target.
This scenario renders two reasons to reconsider annuities in a low rate environment. First, the fear of any loss to inflation for the next two to five years is negligible. Second, interest rates are not going to rise and create very many new opportunities any time soon. One could argue of course that there is always the option to choose higher yield investment options such as stocks but with that come the loss of liquidity and considerably more risk.
Fortunately, forward-thinking annuity product developers are stepping up their game and creating products that are more advantageous than the norm in a low rate market.