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June 25, 2018 at 05:38 PM
Your clients may be missing out on one of the best ways to grow their money: annuities.
That statement may have provoked a startling gasp or groan out of you. Many brokers and advisors already have strong feelings about annuities, but because of those feelings, clients could be suffering financially.
Annuities are often overlooked because clients assume interest rates are going to rise or think annuities don’t offer an attractive-enough return. Instead of putting money in a five-year annuity, this leads to clients putting their money into short-term vehicles like savings accounts, money market accounts, one-year certificates of deposit or one-year Treasuries. On the surface, this makes sense.
(Related: The Rise of the Volatility-Controlled Annuity)
However, if you dig into specific examples, you’ll quickly see that these assumptions are inaccurate.
Breaking it down
In 2007, many people were attracted to the one-year Treasury’s interest rate of 5%. Thinking that was their best option, let’s say a client put $100,000 into a one-year Treasury. Looking at the available yields at the beginning of each year for the next five years, that money would have grown to $109,568.
Now, in comparison, let’s say that client put the same amount, $100,000, in an annuity with a 4.25% interest rate guaranteed for five years. That may not have looked as attractive as the one-year Treasury at the time because of the difference in interest rates; however, five years later, that money would have grown to $123,134.
Why? Because interest rates on the one-year Treasury declined significantly from 2007 to 2012. In fact, the interest rate at the end of the fifth year was 0.29%; whereas the annuity purchase would have locked in the 4.25 interest rate for five years.
Ultimately, if that client had purchased a one-year Treasury instead of the five-year annuity, they would have missed out on $13,566.
