What this article covers
Opher Ganel compares Charles Schwab fixed annuity quotes for a 60-year-old couple from May and October 2022 and finds that as the Fed raised rates, monthly payouts on a $100,000 annuity rose about 10% for an immediate annuity and nearly 22% for one deferred 26 years. He then weighs those payouts against historical highs and cooling inflation to explain why fixed annuity offers track interest rates and why the window of higher payouts may not stay open long.
Key Takeaways
Higher interest rates mean higher fixed annuity payouts
Insurers that sell annuities raised monthly benefits as the Fed’s 2022 rate hikes pushed bond rates up. In Schwab quotes for a 60-year-old couple buying a $100,000 annuity, the joint life with 20 years certain payout rose from $476 to $522 a month (nearly 10%) between May and October 2022.
The longer you defer an annuity, the more rising rates increase its payout
With payments deferred seven years, the same couple’s joint life with 20 years certain payout rose from $652 to $762 a month, nearly 17%. Deferred 26 years, it rose from $1,101 to $1,342, nearly 22%, because the insurer has more years to benefit from higher investment returns.
Fixed annuity rates can fall quickly once inflation and interest rates cool
New fixed annuity payouts track bond rates, which track interest rates and inflation expectations. With CPI-U inflation cooling sharply in mid-2022, Opher argues the Fed could slow or reverse its rate hikes, making annuities less generous, so buyers who are already considering one may want to start their due diligence soon.
Buying an annuity during a period of high interest rates means you could receive larger payouts and greater guaranteed income in retirement.
Annuities. If they scare you, you’re not alone. I recently wrote about annuities and how they can be a shrewd opportunity or a major financial mistake. However, in the right situation, the right annuity can be very helpful.
Is Social Security an Annuity? You’re Already Paying for One
If you think you’ve never paid for an annuity, you might be surprised…
If you’re an American worker, each paycheck shows deductions for payroll taxes, which help provide your eventual Social Security and Medicare benefits. Social Security retirement benefits are, in many ways, a sort of annuity. However, better than commercial annuities, Social Security benefits get adjusted to account for inflation. Also, those benefits depend on your inflation-adjusted earnings history. They don’t depend on current bond rates. That makes Social Security retirement benefits stand out relative to regular annuities.
How Much Did Annuity Payouts Rise When Interest Rates Climbed in 2022?
Historically high inflation pushed the Fed into making a series of interest-rate increases not seen in four decades. That, in turn, pushed bond rates higher. These higher bond rates prodded insurance companies that sell annuities to raise their monthly benefits.
Significantly.
But are we at the peak?
Below, we see screenshots showing estimated fixed annuity payments for three scenarios. We compare two scenarios, October 24, 2022, to five months prior May 26, 2022. For all three, I used a Charles Schwab annuity calculator for $100,000 single-premium annuities for a 60-year-old Maryland couple.
Scenario 1: Immediate Annuity Payouts Rose About 10% to 12%
In May 2022, we saw the following.
Now, with higher rates in the market, we see new monthly income numbers.
Looking at the highest minimum payout option, “Joint Life with 20 year certain,” we see monthly payments increased from $476 to $522. That’s nearly a 10 percent increase. The “Joint Life Only” payments increased by 12 percent.
Scenario 2: 7-Year-Deferred Annuity Payouts Rose 13% to 17%
For this scenario, our hypothetical 60-year-old couple pays $100,000 now and defers payments until they reach age 67 in 2029.
Five months ago, such a couple could expect the following payments.
Today, those payments would also be higher.
Looking again at the highest minimum payout option, “Joint Life with 20 year certain,” we see monthly payments increased from $652 to $762. That’s nearly a 17 percent increase. The “Joint Life Only” payments increased by 13 percent.
Scenario 3: 26-Year-Deferred Annuity Payouts Rose Nearly 22%
For this scenario, too, our hypothetical 60-year-old couple pays $100,000 now, but here they defer payments until they reach age 86 in 2038. Five months ago, they’d have expected the following payments.
Now, the payments have gone up a lot.
With so many years for the issuer to benefit from investment returns, the monthly payments for “Joint Life with 20 year certain” increased from $1101 to $1342, nearly 22 percent higher! The “Joint Life Only” payments also increased by nearly 22 percent.
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How Did 2022 Annuity Payout Rates Compare With the 2008 Peak?
According to ImmediateAnnuities.com, rates now are the highest they’ve been in over a decade. A 65-year-old man could get about $570 a month for a “single life with 10 years certain.”
That’s 27 percent higher than the $450 they show for early 2021, though still 16 percent lower than the $675 peak seen in late 2008.
However, as shown below, Schwab estimates a 65-year-old man could get as much as $641 from a “single life with 10 years certain” annuity, just 5 percent lower than the ImmediateAnnuities.com 2008 peak.
How Does Inflation Affect Fixed Annuity Payouts?
Using the Bureau of Labor Statistics (BLS) inflation calculator, we see the most recent year-over-year seasonally unadjusted “Consumer Price Index for All Urban Consumers” (CPI-U) increased by 8.2 percent.
That’s still in 40-year-peak territory.
Over the past five months, however, the CPI-U increased by just 2.66 percent.
Annualizing that, we’d get 6.5 percent.
Even more interesting is how inflation behaved in the last three months. From June to September 2022, the CPI-U increased a barely noticeable 0.17 percent.
Annualized, it would be just 0.68 percent.
That’s right. If inflation continues for another nine months at its recent three-month average rate, the June 2023 CPI-U would be less than one percent higher than in June 2022!
Since payments offered by new fixed annuities track bond rates and bond rates track interest rates and inflation expectations, lower inflation could quickly lower payments promised by new fixed annuities.
The Bottom Line: Have Fixed Annuity Payouts Peaked?
Honestly, it’s impossible to know.
Quite possibly not, but they may be getting close to their peak.
And, they’re high enough that if you’ve been thinking about buying an annuity, now seems like a good time to start your due diligence with a view to buying soon.
Just make sure to talk with a professional who doesn’t raise any red flags.
Given the recent lull in the CPI-U’s race up and the mounting concern that continuing to raise rates aggressively could slide the economy into a deep recession, the Fed may, sooner than expected, moderate the pace of rate increases, stop raising rates completely, or even reverse course.
Once that happens, expect annuities to become less generous. By that point, you might have missed the opportunity before even realizing it was there.
Frequently Asked Questions
Do higher interest rates increase annuity payouts?
Yes, for new fixed annuities. Insurers base the payments they offer on bond rates, so when rate increases push bond rates higher, monthly benefits rise. In the quotes compared in this article, payouts rose roughly 10% to 22% in five months during 2022.
Is Social Security a type of annuity?
In many ways, yes. Payroll taxes help fund Social Security retirement benefits that pay a monthly income for life. Unlike commercial annuities, Social Security benefits are adjusted for inflation and depend on your inflation-adjusted earnings history rather than current bond rates.
Why do deferred annuities gain more from higher rates than immediate annuities?
When payments start years later, the insurer has more time to earn investment returns on your premium. In this article’s examples, a 7-year-deferred annuity’s payout rose nearly 17% and a 26-year-deferred annuity’s rose nearly 22%, compared with nearly 10% for an immediate annuity.
How does inflation affect fixed annuity rates?
Payments offered by new fixed annuities track bond rates, and bond rates track interest rates and inflation expectations. If inflation cools and the Fed slows, stops or reverses rate increases, payouts on newly purchased fixed annuities can drop quickly.
Is it a good time to buy an annuity when interest rates are high?
It can be, if an annuity already fits your plan, because higher rates mean larger guaranteed payments. The article suggests starting your due diligence while rates are high and working with a professional who doesn’t raise any red flags, while noting it’s impossible to know exactly when payouts will peak.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.