Are Annuity Rates Going Up?

Rates for fixed annuities rose steadily throughout 2022 and 2023 after remaining stagnant in the previous years. This trend has started to reverse in the last few months of 2024, with average 5-year annuity rates decreasing from 5.33% in December 2023 to 4.19% in September 2024.

The rise in annuity rates (particularly when compared to similar products such as certificates of deposit) spurred a surge in sales of fixed annuities in 2023. According to trade group Limra, fixed deferred annuity sales totaled $164.9 billion in 2023, beating 2022’s record sales by 46% and more than tripling the $53.1 billion sold in 2021.

Despite this unprecedented growth in annuity sales, Limra predicted that sales in 2024 would not outpace the previous year. Limra’s report cited an expected decline in annuity rates as one reason for the predicted lower sales.

How Do Interest Rates Affect Annuity Rates?

Generally, fixed annuity rates rise and fall parallel with larger interest rate trends. The trend in stagnant annuity rates during the years of the COVID-19 pandemic, along with the rising annuity rates over 2022 and 2023 mirrors the fluctuations in Federal Reserve interest rates in those years.

When the Federal Reserve raises interest rates, the interest earned on bonds also increases. Bonds make up the majority of many annuity insurers’ portfolios. The insurance company takes fixed annuity premiums, invests them in bonds and other low-risk securities, and credits interest to the annuities based on the returns of those securities.

Because Federal Reserve interest rates influence bond returns, and those bond returns affect the rates for fixed annuities, the Fed’s interest rates can be considered an accurate indicator of which direction annuity rates are likely to go.

On September 18, 2024, the Federal Reserve officially lowered the target range of the federal funds rate by 0.50%. Based on historical trends, it is reasonable to assume that rates for related financial products like bonds, CDs and fixed annuities will decline in response to this rate cut.

Annuity rates are at their highest point in close to two decades and they won’t stay there forever. While annuity rates tend to remain steadier than jumpy mortgage or CD rates, they will start to fall when the Federal Reserve begins cutting interest rates. As of today, September 2024 is considered to be the most likely time when a rate cutting cycle will begin and annuity rates will begin to drop from then on.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

What’s the Cost of Waiting for Annuity Rates To Rise?

No matter what you choose, the decision to buy an annuity now or to wait for interest rates to rise comes with risks and rewards. When choosing financial products like annuities, consider the opportunity cost. 

Opportunity cost refers to the value lost when you choose an alternate course of action. In other words, when you delay purchasing an annuity — or investing your money in some other way — you lose the value of the foregone growth on those funds. And if the funds had the potential for exponential growth and income tax deferral, the financial loss may be greater than you think.

Future Uncertainty

Perhaps the most glaring issue is that you can’t know that interest rates will actually rise in the future. 

As previously mentioned, the Federal Reserve’s monetary policy largely influences interest rates as it seeks to stabilize the economy. We can’t predict either the economy or the Fed’s reaction to it. Interest rates may rise, fall or even remain flat for very long periods of time. 

Lost Time

If you own a deferred annuity, waiting to buy means missing out on potential growth. 

“Deferred” refers to the fact that payments begin in the future, rather than immediately after you purchase the annuity. During that time, your annuity may grow according to the terms of your particular contract. Your interest will likely compound, although some annuities pay simple interest. 

When you have an investment that allows for compound growth, interest is added to your principal. If your interest is compounded annually, for example, the first year, you will earn interest on your initial investment — in terms of an annuity, this would be your premium — in the first year. In year two, your interest will be calculated on the balance at the end of year one, and so on, for the duration of the contract. 

If you wait to purchase, you miss out on the time your annuity could have accumulated that compound interest. 

Keep in mind that annuities also have the benefit of growing tax-deferred. You don’t have to pay tax on it until you begin receiving your payments.

Real-World Example: What You Could Lose by Waiting

Several factors influence the potential loss you could incur by waiting for interest rates to increase. The most significant factors include the type of annuity you buy and the interest crediting method the insurer uses to determine how interest is handled.

Imagine you’re interested in a multi-year guaranteed annuity (MYGA) purchased with a lump-sum premium of $100,000 that guarantees a 2.4% interest rate for five years and would grow in value to $112,589.99 by maturity.

If you wait a year to buy this type of annuity, you must secure a 3% interest rate to accumulate the same value by your target date.

This example won’t apply to every type of annuity. You have other options, including putting your money in a high-yield savings account for a year and purchasing an annuity with a higher premium.

To illustrate, imagine depositing that same $100,000 into a high-yield savings account that offers 1.0% for one year. You would have an additional $1,000 after the year is up. If you then put the entire $101,000 into a four-year MYGA, you would need a lower 2.75% interest rate to accumulate $112,576.75 by your target date.