Sadly, bad news has emerged on the annuity front — and brokers and agents should inform their clients and prospective clients accordingly and help them cope. Annuity payouts have been declining, typically about 10 percent, and those insurance companies that have yet to trim payouts are highly likely to do so as the year progresses.
The reason is that insurance companies are adopting new mortality tables that show people are living longer (three additional years for men, to 88.5 years; and two additional for women, to 90.3 years). This requires insurers to offer guaranteed lifetime payments for a longer period overall, and that means they have to offer lower lifetime income streams to remain profitable.
There may be some sunshine down the road to offset the clouds. New annuity buyers could catch a break later this year because the Federal Reserve recently started raising interest rates for the first time in nine years. Increases in short-term interest rates typically spark increases in long-term rates, with a lag. If this happens again, insurance companies would reap higher profits from their bond investments and likely increase payouts to try to jumpstart sluggish sales.
This scenario is still likely, despite growing economic and financial woes, albeit the timing of interest rate increases has been pushed back. In the end, all that is really clear today is that the interest rate outlook is highly uncertain, boding well for a new 2016 annuity buying strategy.
Agents and brokers should continue to advise prospective annuity buyers not to postpone their purchase, even though interest rates now appear stalled. However, they should adopt a new twist in approaching investors …
Annuities could certainly be more generous, but they still pay much higher interest rates than bank CDs and are almost as safe. In addition, a delay in purchasing annuities forces most investors to turn, in the interim, to conventional investments, such as stocks and bonds. These currently offer poor prospects. Consequently, what prospective annuity buyers should consider today is building a ladder of fixed annuities with different maturities, which offer decent interest rates and which hedge, in part, against the risk of rising rates.
For this option, Multi-Year Guarantee Annuities (MYGAs) should be the investment of choice. These are unaffected by mortality table changes and generally pay 2 percent to 3.25 percent annually for three to 10 years, and taxes, unlike a CD, are deferred until withdrawal in a non-IRA account. This allows the annual yield to compound and grow more.