If you have crossed 60 and are contemplating a decision to invest in immediate annuities so that you get a regular and steady income for life, you may be weighed down by the question as to whether you should wait for interest rates to rise. This is because once you buy an annuities, you lock yourself with the current interest rate and do not get the benefit of an upward movement in interest rate, if it ever happens.
What are immediate annuities
It’s a product floated by life insurers like Edelweiss Tokio Life Insurance to provide you with a steady income flow during retirement. You’re assured a monthly/quarterly/yearly payout in exchange for you paying a lump sum as a single premium. The payouts start immediately from the year succeeding the one in which you have paid the single premium.
In annuities, payout size will depend on two things:
- Your age the older you are, the more amount you get but for a shorter period
- Current interest rates the higher they are, the more you get
On the face of it, you may be taking a good decision by waiting for interest rates to rise. But if you look at it deeply, there are three things that you need to consider.
1) Interest rates are heading southwards
In the long-term, the India Interest Rate is projected to trend around 4.75 percent in 2020, according to our econometric models.* This is bad news for people who want to wait for higher inters rates to buy immediate annuities. Over the last 5 years, India, mirroring the world trend has witnessed downward interest rate movement. It does not seem prudent anymore to wait for interest rates to go northward to buy immediate annuities as it may never happen.
2) Older you are, shorter the period of annuities
The older you are, the shorter is the period for which you are going to collect regular annuities. Although the amount will be higher, but the period will be shorter. This point has to be considered in the light of the next point.
3) What do you do with the money while you wait?
If you eventually decide to wait for interest rates to rise, the money that is lying idle with you may tend to dissipate due to inflation or due to the temptations of spending. If you do not put it somewhere and make good use of it, you may be left with a smaller corpus to invest if incase interest rates rise in the future.
So, in all fairness, do not wait for the interest rates to rise. Take a decision to invest in immediate annuities in small batches so that:
- a) It gives you more of a chance to see if you can make do with the amount that you are receiving so that you can invest the rest of the surplus at your disposal in high-return and high-liquidity assets like stocks.
- b) It lets you keep some apples to yourself so that if interest rates become hot, you have the resources to ride the wave. In other words, if interest rates soar and peak, you still have an opportunity to make most of it.