The rate you get on the annuity is probably the most important factor to consider when you’re shopping for an annuity. Note that you need to consider the actual returns you see rather than the interest rate you’re promised. For example, it is what you keep after fees and taxes that determine how much money you have to live off of. Here are a few tips on how to get the best annuity rates.
Wait Longer to Collect
The annuity has a present and future value. The present value is how much money you put in plus any compound interest on the principal. If you can wait another six months, the balance has had more time to grow. This will result in a higher interest rate paid to you when you activate the annuity and begin collecting the money.
Wait Longer to Buy
The older you are when you buy the annuity, the higher the interest rate and associated payments. This is because you’re not expected to live as long as someone five years younger.
Do Your Research
Are you considering a fixed-rate annuity because it is more reliable? You know how much money you’re going to get every month, after they determine what interest rate, they’re going to pay you. However, annuity contracts don’t all pay the same interest rate. And fractional differences in interest rates do matter. For example, let’s take a 100,000-dollar annuity contract expected to last twenty years. We’ll keep the math simple and say you’d have yearly withdrawals.
In this scenario, a 3% interest rate allows you to withdraw $6,525.80 each year. If they promise a 3.25% interest rate, then you get $6,661.39 per year. If the interest rate is 4%, you get $7,075.17 per year. That’s roughly 500 dollars a year to live on. And let’s be honest – a 4% interest rate on an annuity is pretty good. Someone citing a 7% interest rate is misleading; these rates require you taking incredible risks with the money, are only possible when the market is at its peak and may result in you getting nothing if the market is down.
Of course, the benefits of finding a higher interest rate multiply with the size of the deposit. If you’re rolling over a 500,000-dollar pension into a 20-year 3% annuity, you get $32,628.98 each year to live on. Securing a 3.5% annual growth rate allows you to live on $33,900.86. What could you do with an additional $1,300 a year every year for the next twenty years?
Limit How Long You Collect
You’ll get a better interest rate if the length of time the insurance company has to make payments is likely to be shorter. For example, an annuity that pays out to your surviving spouse costs them more than one that ends with your life. If the annuity will make payments to your dependent children or estate after you die, you’ll get a lower interest rate, too. Adding options like a joint and last survivor option will result in a lower interest rate and lower payments, because these extras increase the insurance company’s costs. Women get a lower interest rate than men, because they tend to live longer.
Find out if an annuity company will factor in your health conditions when you buy the annuity the way life insurance companies do. If you have high blood pressure and diabetes or other conditions likely to shorten your life expectancy, some annuity companies will pay you more because they don’t expect you to live as long.
Wait Until Interest Rates Rise
Financial institutions predict how much they will make on your principal once it is invested based on today’s interest rates. If you buy an annuity when interest rates are near zero, you’ll get less than someone who bought the annuity when interest rates were 3% or more.