Brandon Renfro, Ph.D., CFP®, RICP®, EA, Annuity.org expert contributor
  • Written By
    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Brandon Renfro, Ph.D., CFP®, RICP®, EA

    Co-Owner of Belonging Wealth Management

    As a Certified Financial Planner™ professional and Retired Income Certified Professional®, Brandon Renfro is well-versed in the financial information and strategies needed to meet retirement goals. In addition to co-owning Belonging Wealth Management and assisting clients, Brandon writes regularly for financial publications.

    Read More
  • Edited By
    Savannah Pittle
    Savannah Pittle, senior financial editor for Annuity.org

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

    Read More
  • Financially Reviewed By
    Thomas J. Brock, CFA®, CPA
    headshot of Thomas J. Brock, CFA, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Updated: August 23, 2023
  • 6 min read time
  • This page features 4 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite Annuity.org's Article

APA Renfro, B. (2023, August 23). The Cost of Waiting for Annuity Interest Rates To Rise. Annuity.org. Retrieved June 22, 2024, from https://dev.annuity.org/annuities/rates/cost-of-waiting/

MLA Renfro, Brandon. "The Cost of Waiting for Annuity Interest Rates To Rise." Annuity.org, 23 Aug 2023, https://dev.annuity.org/annuities/rates/cost-of-waiting/.

Chicago Renfro, Brandon. "The Cost of Waiting for Annuity Interest Rates To Rise." Annuity.org. Last modified August 23, 2023. https://dev.annuity.org/annuities/rates/cost-of-waiting/.

Why Trust Annuity.org
Why You Can Trust Annuity.org
Annuity.org has provided reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities and financial literacy topics using plain, straightforward language.

Our Partnerships, Vision and Goals

We pride ourselves on partnering with professionals like those from Senior Market Sales (SMS) — a market leader with over 30 years of experience in the insurance industry — who offer personalized retirement solutions for consumers across the country. Our relationships with partners including SMS and Insuractive, the company’s consumer-facing branch, allow us to facilitate the sale of annuities and other retirement-oriented financial products to consumers who are looking to purchase safe and reliable solutions to fill gaps in their retirement income. We are compensated when we produce legitimate inquiries, and that compensation helps make Annuity.org an even stronger resource for our audience. We may also, at times, sell lead data to partners in our network in order to best connect consumers to the information they request. Readers are in no way obligated to use our partners’ services to access the free resources on Annuity.org.

Annuity.org carefully selects partners who share a common goal of educating consumers and helping them select the most appropriate product for their unique financial and lifestyle goals. Our network of advisors will never recommend products that are not right for the consumer, nor will Annuity.org. Additionally, Annuity.org operates independently of its partners and has complete editorial control over the information we publish.

Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs.

How Are Annuities Affected by Interest Rates?

Just as you would compare offers from lenders when purchasing a home, you should shop around and compare quotes from insurance companies when buying an annuity. The difference, of course, is that rather than seeking the lowest rate, you are looking for the highest interest rate you can earn on your premium.

When interest rates are higher, deferred annuities grow more and immediate annuity payments are higher. Although interest rates aren’t the only consideration for insurers setting annuity rates, they are a key factor.

If you are interested in purchasing an annuity, but are contemplating whether to buy now or wait for interest rates to rise, revisit your holistic financial plan. Perhaps, an annuity is sensible for you, but it may not make sense to put all your money into one. Rather, an annuity could be a nice complement to a portfolio of stocks, bonds, alternative investments and cash equivalents.

— Thomas Brock

What Is Considered a Good Interest Rate for an Annuity?

There is no universally good or bad rate for an annuity. Rather than thinking about whether the return itself is good or bad, it’s better to rephrase the question slightly.

Instead, ask yourself if purchasing the annuity would make you better off. That’s a broader and more purposeful question. Remember, because annuities are insurance products designed to provide guaranteed lifetime income as opposed to growth, it’s somewhat counterintuitive to think of these products in terms of “good” interest rates.

For example, maybe you are considering using 10% of your savings to purchase a single premium immediate annuity (SPIA). That decision involves considering the tradeoff between the income and stability the annuity would provide and the income you could have otherwise generated with the money. Often, that other option is a diversified portfolio of stocks and bonds.

You should compare the possibility that you may spend more from the diversified portfolio with the fact that the annuity income is secure. If you decide the annuity is a good choice, then that implicitly means the interest rate is sufficient.

Annuity rates on a phone

Purchase an Annuity Today

Learn how an investment today can provide guaranteed income for life.

Let’s Talk About Your Financial Goals.

Take our free 3-minute quiz to match with a financial advisor instantly. Recommendations tailored to your goals.

How Delaying Your Purchase Can Lead To Financial Loss

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. 

The Federal Reserve’s monetary policy largely influences interest rates as they seek 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 you’re 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 do 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, you miss out on the time your annuity could have been accumulating that compound interest. 

Pro Tip

If you wait to purchase your annuity, you’ll need to be sure that whatever you decide to do with that money in the meantime is expected to grow at a faster rate than the annuity would have. Otherwise, you aren’t actually better off. 

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 of these 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 would need to 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.

Other Strategies To Consider

Before you decide whether to wait to buy an annuity, consider additional strategies:

Annuity Laddering

Rather than using the entire amount you intend to on one annuity contract, you can purchase several annuities at different times to follow an annuity laddering strategy. 

That may mean using a portion of your savings to purchase a SPIA in each of the next five years rather than all at once. Or, you may purchase several MYGAs, each with different maturity dates. For example, you may purchase MYGAs that mature in each of the next five years. If rates do rise your most recent purchases will benefit.

1035 Exchange

You also have the option of using a 1035 exchange to transfer to a new annuity contract with a better interest rate later. If you’re using this strategy, consult a trusted financial advisor to ensure compliance.

Stick To Your Plan

Thinking in terms of return maximization on your annuity is not likely to be the best framework for making your decision in the first place. Your original plan may be the best option for your circumstances.

Remember that the main benefit of annuities is their ability to provide you with a secure and reliable income stream. Whether an annuity is a good idea for you or not is more about the pros and cons of owning an annuity and how it fits into your overall plan rather than the return you might receive.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 23, 2023

4 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Accounting Tools. (2022, May 12). Compounding Period Definition. Retrieved from https://www.accountingtools.com/articles/compounding-period
  2. Loma.org. (2022). Today’s Fed Move Improves Outlook for Annuity Sales. Retrieved from https://www.loma.org/en/news/industry-trends/2022/todays-fed-move-improves-outlook-for-annuity-sales/
  3. Pfau, W. (2020, June 3). Payout Rates and Rates of Return for Income Annuities. Retrieved from https://www.forbes.com/sites/wadepfau/2020/06/03/payout-rates-and-rates-of-return-for-income-annuities/
  4. Board of Governors of the Federal Reserve System. (n.d.). Why Do Interest Rates Matter? Retrieved from https://www.federalreserve.gov/faqs/why-do-interest-rates-matter.htm