Does an Annuity Make Sense with Low Interest Rates?

Continued from page 3...

So what should you do given this inherent uncertainty?

Lately, I've been suggesting to clients that once they've decided to go the annuity route, it makes sense to lock in their future income in stages, a concept called "annuity laddering". For example, you could divide the total amount you have in mind to invest by 3. Then purchase your first "installment" today, the second a year from now and the last tranche in two years.

Or, you could divide your premium into two or four buckets. There is no magic number of purchases that is sure to be more successful than another.

The main advantage to this approach is that you leg into your annuity investments gradually. You protect yourself from committing when rates are at an extreme.

I contacted Immediate Annuities.com to buy one of my immediate annuities. They were prompt, very responsive, paid attention to detail, understood my objectives, and were superb when it came to staying on top of seeing the funds transfer and issue of new policy documents through to completion.

Dr. David Babbel Professor Wharton School

Read 650+ verified reviews

So instead of trying to finesse the interest rate markets, I'm suggesting you consider annuitizing in stages. And while I have your attention, may I direct you to look at the following article on how to combine an annuity with a traditional portfolio to boost the chances of your nest egg lasting for life.

Interest rates just can't get any lower

One final comment -- You may be thinking: “Sure, laddering makes sense, except Stern isn't really addressing my main concern which is why should I buy any amount of annuity right now when interest rates just can't get any lower than they are?”

Well, here's my take: What causes interest rates to rise? Why did they move up dramatically during the 1960's and 70's?

At that time the following were in play: there was robust global growth following WWII, the US was experiencing full employment, the housing market was strong, and consumers had a lot of discretionary income to spend. These were the underpinnings of high inflation in the 70's which was the prime mover of interest rates.

Right now, however, economic growth is tepid around the globe (except perhaps in the US) and deflation is the problem. There is little risk of hyper-inflation on the horizon.

So, what are the chances annuity rates will be at 6% five years from now? Until all the inflationary factors are operating together annuity rates are likely to be stuck in their present ranges.

PS -- How low can interest rates go? Have a look at these Japanese interest rates, they've been below 1/2 of 1% for 20 years. When on the BOJ page CLICK the "Interest Rates" icon to view the actual rates.