Rate Cuts and Annuity Yields
The Federal Reserve announced a widely expected 25-basis-point rate cut on October 29, the second time this year.
The move to lower interest rates is good news for Americans. Yet, it can be a different story for annuities, as it can impact their prices and lifetime income.
Insurance companies rely on interest rates to assess how much income they can generate from your premium over time. Insurers can generate more income and offer more payouts when rates are high. However, the payout is lower for the exact came cost in a low-rate environment.Several carriers are already reducing fixed annuity rates that recently topped 6%, signaling the end of a rare high-rate window. Financial experts say consumers who act quickly can still secure guaranteed returns that may not be seen again for years.
Is the High-Yield Window Closing?
Yehuda Tropper, CEO of Beca Life Settlements, said that many retirees are worried about outliving their savings and turn to annuities to address this concern.
“The issue now is that when the Fed was fighting inflation, rates went up, and we saw fixed annuities hit over 6%. We hadn’t seen that in a long time. But now with the Fed cutting rates, carriers are already pulling back yields,” he said.
Tropper explains that this happens because annuities are priced based on the bond market, and the bond market follows the Fed’s lead. When rates drop, so do the guaranteed income payouts insurers can offer.
“If you lock in a fixed annuity today at 5.5% or 6%, that’s your rate for life. But if you wait six months, you might only get 4.5%,” he said. “For someone with $500,000 and decades left to financially plan for, they could be looking at thousands less in annual guaranteed income.”
Bobbi Rebell, CFP and consumer finance expert at BadCredit.Org, echoed the sentiment, saying that if someone were planning to buy annuities already, the time is now to lock in higher rates.
“Securing guaranteed income creates financial security and peace of mind. It can be a very good thing, especially as we move up in years,” she said, adding that annuities can be a smart way to diversify a portfolio with that portion providing security, allowing other financial resources to be allocated into more aggressive investments.
Should Consumers Act Quickly?
Annuity contracts lock in your rate for the term, often spanning three, five, or seven years. Consumers who move before further cuts are in a position to preserve today’s higher yields for the duration of their contract.
“Once you’re locked in, you’re insulated from future declines for the length of your contract,” said Steve Sexton, CEO of Sexton Advisory Group.
Sexton further noted that historically, fixed annuities in the 5-6% range have been rare and have hovered around 2% to 3% for most of the past decade.
“This is why many believe this is one of those fleeting ‘sweet spots where you can secure strong, predictable income without market volatility. Waiting even a few months could mean losing a full percentage point or more in guaranteed return,” he said.
Some experts also argue that interest rates, in general, will remain higher than they have been over the previous decade.
Rona Guymon, senior vice president of Nationwide Annuity Distribution, said Nationwide believes they will remain high enough to continue offering strong rates across fixed annuity products for the next few years.
According to her, whenever interest rates are higher than historical averages, it provides a great opportunity for investors to lock in higher rates of interest.
However, she also noted that predicting interest rate movements is difficult.
“Working with a financial professional who understands your investment risk tolerance and goals can help you find the right products and accounts to meet your needs in any interest rate environment,” she said.
Why Does It Matter For Retirees?
As Sexton noted, for near-retirees and retirees, predictable income is the foundation of a secure retirement plan. And in an environment where the stock market is volatile and bond yields are trending down, locking in a high fixed rate now can meaningfully increase your future cash flow – and peace of mind in your golden years, he said.
“Fixed annuities aren’t for everyone, but for conservative investors looking to balance safety with yield, this moment represents a rare opportunity that we haven’t seen in over a decade,” he added.
Michael Unger, vice president of investments and planning at Coral Gables Trust, agreed, saying that retirees and near-retirees who lock in a fixed annuity today are essentially capturing a moment in time, securing a guaranteed rate that may not reappear for years.
“Even a 50 to 100 basis point drop can have a meaningful impact on lifetime income projections or long-term compounded returns,” he said, adding that for retirees, this is not simply about yield, it’s about stability.
Unger added that with the Federal Reserve moving toward easier monetary conditions, the current window of elevated annuity yields appears to be closing, and those who delay may find themselves locking in at lower rates.
