Annuity Cash Value & Market Conditions

Purchasing your annuity was a wise investment because of its stability, but how much your structured settlement is worth can still fluctuate based on the market.

Are Annuities a Good Investment?

Annuities are a popular investment choice because they offer buyers a lower level of risk compared to many other types of investments. However, this doesn’t mean annuities are exempt from all risk.

Variable annuities, for example, rely on the success of the stock market to grow your investment. When the stock market falls, so does the value of your annuity.

Annuities are also long-term investments that inflation can easily affect. The value of the dollar almost always decreases over time, meaning you could be losing purchasing power between the time you bought your annuity and the time it pays out. Alternatively, if your cost of living increases (which it almost always does), your investment will be valued much lower when it pays out.

Age and Investing in Annuities

The closer you are to retirement, the more you should pay attention to market conditions. Your investment could be at risk if you’re in a bear market — when stock values fall naturally and people begin to sell stocks, which further drives down costs.

While the stock market typically does recover from this natural decline in value, it can take time, which you may not have depending on when your annuity begins paying out. If your structured settlement pays out and the stock market value is low, you could be losing money on your annuity.

Interest Rates and Annuities

There are many different types of annuities you can purchase. One of the biggest differentiators between them is the interest rate. These interest rates make a large impact on the value of your structured settlement or annuity over time.

In general, annuities are considered to be a good value because of the tax advantages. If you withdraw some funds from your structured settlement early, for example, you’ll be charged a normal interest rate rather than a capital gains rate.

Fixed and variable annuities are two of the most popular types of annuities. Fixed annuities grow by a set interest rate over time, offering minimal risk to investors. Variable annuities invest in the stock market or other financial markets, meaning the account’s interest rate changes as the market does.

There are advantages and disadvantages to both types. Fixed annuities are guaranteed to grow by a certain amount, which offers security, but that rate of growth may not be enough to keep up with inflation or a rising cost of living. Variable annuities can grow at a much higher rate than fixed annuities, but they can also fall in a bear market and decrease the value of your annuity.

Protecting Your Annuity From Market Changes

There are some safeguards you can put in place to reduce the market’s impact on the value of your annuity. If you decide a fixed annuity is the best investment for you, ask about adding a market value adjustment rider (MVA).

MVAs ensure your annuity’s interest rate is on par with current market conditions. These adjustments can be positive or negative, but will not go below the minimum interest rate guaranteed on your account (typically 2 or 3 percent).

How Much Is My Annuity Worth?

How much your annuity is worth is also called cash value or present value. The cash value of your structured settlement changes over time based on a number of different factors. This is a good thing — although some annuitants are exposed to more risk than others, annuities typically grow over time.

Your annuity will grow because of compounding interest. As a tax-deferred investment, you’ll begin earning interest on your interest accumulations from day one. As a result, your annuity will be worth more years from now than it is currently.

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Growing cash value means more money for you in retirement, or more money now if you choose to sell some or all of your annuity. You can use an annuity calculator to help you determine this cash value. Structured settlement calculators use factors like the following to determine your cash value:

  • Current annuity balance
  • Payment amount per year
  • Growth period
  • Disbursement period
  • Annual interest rate

Avoiding Risk

If the market takes a turn for the worse, or you’ve realized you put too many retirement eggs in one basket, you may want to consider selling your structured settlement or annuity. In exchange for giving buyers a discount, you will get a lump sum of cash now. This can protect your retirement dollars from a crashing stock market and diversify your nest egg investment.

You have many options for selling, including only selling some of your payments or selling your structured settlement in its entirety. The selling process is easy, but it does involve a court appearance and some legal paperwork. If you have questions about understanding the value of your annuity and protecting your retirement, our financial experts are always happy to help. Call us today.

Page Sources

  1. Manuel, N. (2016, September 27). Are annuities safe in this economy? Retrieved from http://budgeting.thenest.com/annuities-safe-economy-32481.html
  2. Market value adjustment (MVA). (2012, September 23). Retrieved from http://www.annuityadvisors.com/reference/detail/market-value-adjustment-mva?refid=12
  3. O'Brien, S. (2016, July 12). Who should — and shouldn't — consider making variable annuities part of their retirement portfolio. Retrieved from https://www.cnbc.com/2017/07/17/the-pros-and-cons-of-annuities-in-a-retirement-portfolio.html
  4. RetirementHQ. (n.d.). What is a bear market, and how will that impact my retirement savings? Retrieved from http://www.retirementhq.com/what-is-a-bear-market-and-how-will-that-impact-my-retirement-savings/
  5. What is the difference between an annuity cash value vs. a surrender value? (n.d.). Retrieved from https://www.fool.com/knowledge-center/annuity-cash-value-vs-surrender-value.aspx
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