Sales of fixed annuity products have surged in the last couple of years as more investors are yearning for greater stability and guaranteed returns for their retirement portfolios. Billions of dollars that were once churning away in the volatile stock market are now flowing into annuities in search of some certitude. And, while their objective may have shifted from seeking a return on their principal to seeking a return of their principal, many annuity converts are still hoping to get the highest possible annuity rates.
Getting the highest annuity rates is a little more involved than simply combing the internet and flagging the top rates being promoted by overly aggressive annuity providers. They know you’re coming so they are putting their best rate forward in the hopes of luring your investment dollars in for the long term.
Unwitting investors have often found themselves locked into an annuity that started off with promise but then performed disappointingly after the high rates were replaced with more anemic yields. In this extremely completive annuity marketplace, it’s best not to jump in head first to a high rate annuity. Rather, a prudent toe-in-the-water approach is more likely to yield a better long term performance. There are several factors to consider when looking for the highest annuity rates.
How to get the highest annuity rates
The important thing to remember is that annuities are long term investment. One year of high rates does not a solid performing annuity investment make. There are several moving parts in an annuity that can influence its long term performance, and that could mean the difference of thousands of dollars for your retirement portfolio. The prudent course for annuity investors is to look beyond the teaser rate lure and consider all of the factors that go into an annuity’s rate structure.
Annuity providers are most interested in capturing your dollars for as long a term as possible. There’s little profit for them if you suddenly feel compelled to withdraw your funds before they have had a chance to earn a good return on them over the long term. As such, many annuities offer a multi-year rate guarantee as an incentive to stay put with your funds. Rate guarantees can extend out 15 years in some cases.
Generally, these multi-year rates are much higher than one year rates. The longer the rate terms the higher the rate guarantee. The difference between a one-year term and a ten-year term can be as much as 3 points. You may find some annuities that offer a very high one-year guarantee and then a lower rate guarantee for the remainder of the term. The key with these rate structures is the total yield to surrender which assumes that you will keep your funds in the annuity for the duration of the term.
Two big cautions: Read the fine print on the guarantee as some annuities may offer a long term (five to ten year) rate, but only the first few years are guaranteed. Also, if interest rates and market yields begin to rise, you risk being locked into a below market rate.
Annuity providers want as much of your investment dollars as possible, so they will provide an incentive for you to make larger deposits in the form of bonus rates or higher rate guarantees. The rate differences can be as much as one to two points. The rate breakpoints generally occur at the $100,000 and $200,000 deposit level, so the difference of even one percentage point can be significant in terms of the amount of earnings over the term.
High Rates versus Flexible Terms
While the goal is to obtain the highest rate possible, investors need to consider all of their needs, concerns, and preferences when selecting an annuity. High returns generally come with some additional risk or inflexibility. Some investors may prefer more flexibility in the terms of an annuity and would be willing to sacrifice a half point in the rate to get it. Most multi-year rate guarantees have a correlating surrender period that prevents investors from withdrawing funds without incurring a charge.
The surrender charge can start out high, in the 7% to 12% range and then decline by a point each year until the surrender period ends. Some investors may prefer annuities with shorter surrender periods or smaller charges. While there are annuities with more flexible surrender terms, their rates tend to be lower as well. Investors who spend the time to compare enough annuity terms and rates can usually find ones that achieve the right balance for them.
With hundreds of annuities to choose from, investors who take the time to compare them and evaluate annuity providers should be able to find an annuity that offers the right combination of high rates and flexible terms offered through a solid, financially strong life insurance company. The competition for investment dollars is fierce, so there is little that separates annuities offered through financially sound companies and the ones being aggressively marketed with high teaser rates by less sound companies except the peace of mind knowing your investments are safe.