Taking Advantage of Fixed Annuities When Interest Rates Are High

During a high interest-rate environment like we are in now, fixed annuities are a great way to lock in solid returns and provide a stable, risk-free stream of income that isn’t affected by stock market volatility and when interest rates start falling.

As we approach 2025, it’s a good time to take stock, as the Federal Reserve is likely to continue cutting rates this year and the next few years. Fixed annuities still offer attractive returns in this environment and provide a chance to lock in strong rates ahead of further cuts.

The main factor affecting annuity rates is the Fed’s benchmark rate, which in turn affects bond yields. As the benchmark rate falls, so do bond yields, which in turn push annuity rates down as well.

The beauty of a fixed annuity is that it locks in those good yields if you purchase it when interest rates are high … and right now, they’re higher than they have been for more than 15 years, although they fell a bit after the Fed’s half-point rate cut in September.

Looking to 2025

It’s anticipated that the Fed will cut the benchmark rate by another quarter point at its November meeting, and there is likely more to come in 2025.

An article in USA Today projected that the federal funds rate would fall to about 3-4% by the end of 2025, from 4.75-5% in November. Economists interviewed for the story predicted a federal funds rate of 2.9% at the end of 2026, as well as 2027.

These falling rates will reduce future fixed annuity yields, but it will take a bit of time.

According to the economist’s predictions in the USA Today article, rates will decline gradually and rates at the start of 2025 are likely to be higher than they are at the end of the year.

Why fixed annuities are still a hot commodity

Despite the fact that the Federal Funds Rate is expected to decline over the next few years, annuities are still a good option now. Consider:

• Securing a good rate now: You have time now and likely through most of 2025 to lock in strong annuity rates. The earlier the better, since the more the Fed cuts rates the further annuity rates will fall. Annuity rates trail Fed rate decisions, so there still is time.
• Short-term fixed annuities: Another option is to go for a short-term annuity, one that pays out over a three- to five-year term. Buying this instrument gives you the option to reassess when they renew and you can adjust your strategy accordingly.
• Multi-year guaranteed annuities: These vehicles allow you to lock in current rates over a multi-year period, providing you with stability during a period when rates are not stable. If you want predictability, these are a good option.

Spread your risk

You can also spread your annuity risk over different types of annuities to diversify your retirement portfolio, including:

• Variable indexed annuities. These are tied to the market’s performance, thus providing a potential for growth when fixed annuity rates are falling.
• Fixed indexed annuities. These are tied to an index like the SandP 500 and your gains will increase when the index increases. Some FIAs offer a guaranteed minimum interest rate, usually between 1–3%.Your principal is protected from losses if the index performs poorly while providing the opportunity for higher returns when it performs well.
• Laddering strategy: Annuity laddering is a retirement planning strategy that involves purchasing multiple annuities at different times to help increase income and manage risk. By spreading out purchases, you can benefit from different interest rates and avoid committing a large amount of money to a single rate.

A final word

Annuities are not Federal Deposit Insurance Corporation-protected, and you may face penalties for withdrawing funds before the guarantee expires.

If you die while the contract is in force, the principal will be lost unless the annuity includes a joint and survivor payout.