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Annuity Interest Rates – A Look Behind The Curtain

Don’t focus on the annuity interest rate as much as on the annuity payout.

Most retirees’ goal for retirement is to know they are doing the best they can with the resources they have. They want to use these resources in a low risk and low cost way to generate as much income as possible. And if they can get some growth without taking too much risk, then that is important too.

When it comes to generating income, annuities are fantastic tools for retirees to use. And if you want to maximize the income that you get per dollar you invest, then you want to make sure you get the right annuity.

Annuity Income Riders

One of the best features of many fixed index annuities is the option to add an income rider. The income rider allows you to get a lifetime guaranteed income from the annuity, while still having access to the lump sum.

So if you change your mind and you don’t want the lifetime guaranteed income, you can still surrender the annuity and get whatever money is still left in it.

This is giving you the best of both worlds:

1) Guaranteed lifetime income and
2) Flexibility with your principal.

When you see advertisements on the internet that seem to promise a high, guaranteed rate of growth on your annuity, say 8%, it is almost certain that this high growth rate applies to the income rider’s account value.

The income rider will have its own income account value. This income account value is an accounting figure (Monopoly money, if you will) that will be used to determine the lifetime guaranteed income you can receive from that annuity. It’s not real money that you can withdraw and go on your merry way.

But it would stand to reason that the bigger you could grow this income account value, then the more income you would receive off the annuity.

But not so fast!

There is another factor in the equation, called the Distribution Rate. This distribution rate is the percentage of income account value that will paid to you for the rest of your life.

Sound confusing?

Well, let me show you how it works. And you will see how sometimes the highest roll-up rate on an income rider does not necessarily give you the highest amount of income. And income is really the end goal of these income riders. So let’s try to maximize that.

A Tale Of Two Annuities

I have taken 2 actual annuities that are on the market today. The first one has a guaranteed roll-up rate on the income rider of 9% (beat that 8% annuity ads!).

The second annuity has only a pitiful, paltry 4% roll-up on the income rider.

You must be thinking, “There’s no way that 4% annuity will ever be able to guarantee anywhere near the payout that the 9% annuity can.”

And that’s a very reasonable thought. But let’s take a closer look.

So here’s the story:

A 60 year old man wants to buy an annuity with $100,000. And in 5 years he wants to begin drawing a lifetime income from this annuity. He specifically wants to maximize the contractually guaranteed lifetime income amount he can get.

So he goes to one financial advisor. The advisor tells him about the 9% annuity roll-up rate. The advisor says this is one of the highest, if not the highest, roll-up rates on the market today. This would be the best way to maximize the income he could receive from his $100,000 in 5 years from now.

The 60 year old man is ecstatic. A 9% interest rate sounds almost too good to be true. But he figures he better shop around just to make sure.

So he goes to another financial advisor to seek advice. The other advisor says, “Yes the 9% annuity is a great deal in a lot of situations. But let’s take a look at this 4% annuity first.”

The 60 year old man is getting frustrated. “Why would I want to look at your paltry, pitiful little 4% guaranteed rate? I can get 9%!

So the advisor (being responsible and all) shows a side-by-side comparison of the payout rates on both of these annuities. Here is what he shows him:

Annuity Payout Comparison1

As you can see in the above chart, the 9% annuity on the left guarantees a lifetime payout at age 65 of $7,250. This is a payout ratio of 7.25% at age 65.

The 4% annuity is on the right. It guarantees a lifetime income of $7,628. This is a higher payout ratio of 7.628% at age 65.

So What Made The Difference In The Annuity Payouts?

There were 2 main factors that caused the 4% annuity to payout at a higher rate.

First, it had an upfront bonus on the income account value. So although the roll-up rate was only 4% each year, it got an extra boost in the first year, taking its value up to $114,000 immediately.

Second (and most important), the 4% annuity had a higher distribution rate at 5.50% compared to 5.00% for the other annuity.

This is a huge point that is often overlooked when people see advertisements for high roll-up rates. No one ever advertises the distribution rate. Yet it is an extraordinarily critical component of determining how much income you can be guaranteed for the rest of your life.

The Lesson About Annuity Interest Rates

When you are buying an annuity to maximize your income, focus on the actual income you will get from the annuity. Don’t focus on the roll-up rate. It is just one component in the calculation of how much income the insurance company will contractually guarantee you.

The only thing that matters is how much income you can get. So focus on that and tune everything else out.

And also, make sure that your advisor is showing you more than just one illustration. You need to see a side-by-side comparison of at least 3 different annuities.

You need to know that he/she has done his due diligence before making any recommendation to you. I mean, this is your money we’re talking about here. The difference in the above two examples (from income of $7,250 vs income of $7,628) is $378 every year for each $100,000 you invest.

That adds up.


If you know someone that is struggling with making an annuity purchase decision and they could benefit from this, please forward this article to them. You can also easily share it with your friends by clicking the Facebook icon on the left of the screen.

And if you need any help with making an annuity decision, and you want to make the best one that will maximize the benefits you need, then feel free to reach out to me.

You can find a convenient time on my online calendar by clicking here. We’ll have a 20 minute phone conversation and I’ll help point you in the right direction.

Best regards!

Chris Hammond

Annuity Interest Rates

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Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor.  Tri-State Financial Group, and Tri-State Insurance & Financial Services, and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

This information is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Tri-State Financial Group and its affiliates do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.

Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors. Chris Hammond is insurance licensed in TN.