Is Buying An Annuity In A Zero Interest Rate Environment A Good Idea?

The Annuity Man

This fantastic article by Wade Pfau in Forbes addresses the question of if it's a good idea to buy an annuity this zero interest rate environment.

Too many people try and "time" their annuity purchases thinking that interest rates drive the pricing train.  With some annuity types, that is true.  But with lifetime income transfer of risk strategies, life expectancy is the primary pricing mechanism.

Wade's article points out some key details on annuities in this low interest rate environment.  Below are some of his thoughts.

"Historically low interest rates are often used as a reason to avoid annuitizing at the present and forever locking in current interest rates. The logic is that interest rates could increase in the future, which would help support a higher subsequent payout rate from annuities if one waits. This idea is worth a discussion, as it is not correct in the context of a full retirement plan. In addition, deferred annuities that use lifetime income protections without immediately annuitizing the assets do not have this problem. Even for the income annuity, which does lock in the current environment at purchase, the case for its use becomes stronger in a low interest rate environment for someone who is already retired and spending from assets. With low interest rates, the mortality credit or risk pooling component of the annuity payout becomes even more important, making annuities even more attractive relative to bonds. The bond interest component for spending is reduced for both tools as interest rates decrease, however annuities are hurt less by lowering interest rates, since the mortality credit component for spending is not impacted by interest rates."

Read the article in full and you might want to read Wade's new book as well.  Now that's solid annuity advice.

Stan The Annuity Man