Are Annuity Rates Going Up?

Fixed annuity rates have been steadily climbing since 2022 and continue to rise midway through 2024. On average, rates for 5-year fixed annuities increased from 5.33% in December 2023 to 5.62% in May 2024.

Higher rates led to higher sales for fixed annuities in 2023. According to trade group LIMRA, 2023 saw fixed annuity sales skyrocket to $164.9 billion, 46% higher than the record-setting sales of 2022 and more than triple the $53.1 billion of fixed annuities sold in 2021.

LIMRA attributed the record-setting growth in part to improved fixed annuity rates, but the group cautioned that sales in 2024 probably wouldn’t reach the heights of the last two years. In their report, LIMRA said that an expected decline in annuity rates could translate into lower sales.

The rates for fixed annuities may rise or fall depending in part on larger interest rate trends. During the COVID-19 pandemic, interest rates across the economy stagnated and so did annuity rates. In an effort to curb inflation in 2022 and 2023, the Federal Reserve issued several interest rate hikes, and annuity rates increased throughout those years as well.

The reason that annuity rates follow the Federal Reserve’s actions so closely has to do with how insurance companies make money from fixed annuities. Most annuity companies have portfolios made up of bonds and other conservative securities. The company invests fixed annuity premiums in those bonds and securities, then credits interest to annuity contracts based on the returns the portfolio produces.

When the Federal Reserve raises interest rates on federal bonds, other bond issuers increase their rates as well to remain competitive and bond returns influence the interest rates of fixed annuities. This means the Fed’s interest rate shifts are likely to demonstrate whether annuity rates will go up or down, or stay level.

After the previous two years of frequent interest rate increases, some economists and experts believed the Federal Reserve would cut interest rates in 2024. This expectation is part of the reason LIMRA predicted a decline in fixed annuity interest rates and sales.

However, as of April 2024, the Fed has signaled that interest rate cuts won’t happen any time soon. Federal Reserve Chair Jerome Powell said in a policy forum in April that the Fed has yet to see inflation lower to the goal of 2% and so does not plan to lower rates until that target is reached.

If the Fed doesn’t take action to lower interest rates, you could reasonably expect that fixed annuity rates will remain similarly stagnant. If the Fed does decide to lower interest rates later in the year, rates for fixed annuities could mirror that decline.

As with other financial products with fluctuating rates of return, it can be tempting to try to time the market to lock in the best rate. In theory, the best time to buy a fixed annuity would be just before rates go down, but of course, it’s nearly impossible to time your purchase so perfectly.

When thinking about the timing of investments such as annuities, you have to consider the opportunity cost. This refers to the loss of potential advantages when choosing one option over another. In other words, when you choose to open door number one, you lose whatever was behind door number two.

If you choose to wait to buy a fixed annuity because you believe rates will rise, you could incur the opportunity cost that comes with trying to time the market. It’s impossible to predict with certainty how rates will move, so you could end up having to settle for a lower rate if rates fall in the future instead of rising.

There’s also the cost of lost accumulation time. When you purchase a fixed annuity, your premium accumulates interest at a guaranteed rate for a certain period. The interest compounds over time, so the longer you can keep your money in the annuity, the more you could grow your savings.

If you wait to purchase your annuity, you’re losing out on the time that you could have been accumulating interest. While you wait, the money you would have put into the annuity has to be growing at a rate higher than what the annuity would have earned, or else waiting isn’t actually doing you any good.

The decision to purchase an annuity has as much to do with your personal financial circumstances and your retirement needs as it does with the rates being offered. Before purchasing any financial product, consider seeking the opinion of a licensed financial advisor who can make recommendations based on your unique situation.