I get this question a lot: why annuities in today’s low-rate environment? If you buy an annuity now, aren’t you locking in low rates, and doesn’t that mean less value?
Valid question, but first, it’s essential to understand that an annuity is an important financial tool. Annuities can provide guaranteed income for life and can guarantee investment results. They’re essentially a contract with an insurer to receive regular payments for a period of time. They come in many flavors, and some provide steady guarantees while others are tied to the stock market.
They’re always priced to market conditions, exactly like every other financial tool at your disposal. Mutual funds, stocks, bonds, managed accounts, CDs, and annuities all derive their value from current market conditions.
Currently, interest rates are historically low. For context, the five-year treasury yield has been hovering in the 20-30 basis-point range – about a quarter of a percent; at the end of 1999, the five-year treasury yield was over six percent.
So, should you defer an annuity purchase right now due to the low-rate environment? Well, chances are you are not a hedge fund manager capable of timing market imperfections to maximize gains for your portfolio. As such, current market conditions should not derail your long-term goals and objectives.
It’s important to stick with the plan. So, if an annuity is something you’ve already been considering, eschew any short-term thinking when your goals are long-term.
This article originally appeared on The Street.
