By Ben Mattlin, ThinkAdvisor featuring Russ Hill CFP®, AIFA®, Chairman/CEO

From an economic perspective, the year ahead is full of promise — and potential peril. Will the pandemic ease? Inflation lessen? Interest rates rise?

As bond yields remain low, the demand for annuities and other sources of predictable retirement income is surging. Advisory clients interested in annuities may wonder if they need to consider factors like interest rates and the stock market at the time they annuitize.

But while the economy and market movements have some effect on annuity performance, the most important factor is your client’s individual situation, financial planners and annuity experts say.

How to Decide When to Buy an Annuity

“There are many considerations in whether or not to purchase an annuity,” says Winnie Sun, managing partner at Sun Group Wealth Partners in Irvine, California. “First, ask yourself what you’re trying to achieve.”

In general, annuities are insurance contracts that are particularly appropriate for risk-averse clients and/or those seeking guaranteed retirement income, says Russ Hill, chairman and CEO of Halbert Hargrove in Long Beach, California.

Those with a large pension, say, may not need extra income guarantees. But “for your average clients who will be drawing retirement income from their portfolio, an annuity can be an extremely powerful tool to efficiently generate that income,” says Tim Rembowski, a vice president at DPL Financial Partners in Louisville, Kentucky.

Annuities are “not trading opportunities,” says Michael Zmistowski at Financial Planning Advisors in Tampa, Florida. “There is no good or bad time” to buy one. Yet certain economic and market conditions can affect their performance.

Fixed Annuity Investing and Low Interest Rates

Low interest rates, for example, can lower payout rates of fixed annuities. So now might “not be the best time,” says Christopher Van Buren at LVW Advisors in Pittsford, New York — unless, he adds, “you compare them to CDs, money markets or Treasurys.”

If you’re relatively young, “it might make sense to hold off” before locking in a rate, says David Blanchett, head of retirement research at PGIM DC Solutions in Lexington, Kentucky.

Waiting for higher interest rates, however, might not make sense. “When will you know that rates have risen as much as they’re going to?” asks Kimberly Foss, president of Empyrion Wealth Management in Roseville, California.

Wade Pfau of The American College of Financial Services in King of Prussia, Pennsylvania, and founder of, concurs. “If one knew for sure that interest rates were about to rise, then yes,” he says, waiting might make sense. “… But for people who are already retired, I don’t necessarily think it’s worth waiting.”

Mortality Credits

In fact, waiting might backfire. Annuities rely on mortality credits (sometimes called “risk pooling”), which calculate each annuitant’s life expectancy. The older you are when you buy, the lower your likely payout.

“Mortality credits can actually make annuities more attractive than bonds when interest rates are low,” says Michael Harris at the Washington, D.C.-based Alliance for Lifetime Income.

FIAs, VAs and the Stock Market

Equity markets can affect annuities, too.

Fixed indexed annuities (FIAs) mimic the performance of a market index, such as the S&P 500, with a limit on the downside risk. FIAs “can be a good option to help diversify the fixed income portion of a portfolio,” says Frank O’Connor at the Insured Retirement Institute in Washington, D.C.

If you’re really bullish, variable annuities (VAs) invest in mutual-fund-like subaccounts that enable a greater degree of market participation, without volatility protection. “Current VA sales are being fueled by lower equity market volatility,” says Todd Giesing at the Secure Retirement Institute in Windsor, Connecticut. “Typically we see sales decline … in periods of high market volatility.”

VA advocates typically recommend riders that, for a fee, can help offset volatility — “living benefits,” says O’Connor, “which can guarantee income even if account values fall.”

Another option is the “structured” VA, also known as a registered index-linked annuity (RILA) — a variable annuity with a more generous cap than most FIAs and a partial buffer against downside risk.

“If inflation and rising interest rates represent a particular risk to a client’s goals, then an FIA or RILA might make more sense,” says Bryan Montemurro of Two West Capital Advisors in Overland Park, Kansas.

Why Invest in Annuities?

There are many different types of annuities, for different client situations. “An individual’s plan is the most relevant benchmark to follow,” says Jason Branning of Branning Wealth Management in Ridgeland, Mississippi.

To some, annuities are bond substitutes. “It’s reasonable to have a certain percentage of your fixed income allocation in annuities,” says Ari Fischman at Telemus in Southfield, Michigan.

For others, they serve as accumulation vehicles. “Interest rates should not be the determining factor in whether an annuity is appropriate or not,” says Brett Bernstein, CEO of XML Financial Group in Rockville, Maryland.

Insurance Products

But most of all, annuities are insurance products designed to solve certain retirement-plan risks. “An annuity may be an excellent choice for investors looking to bolster their retirement income or for those interested in growing their nest egg in the equities market with a level of downside protection,” says Corey Walther, president of Allianz Life Financial Services in Minneapolis.

Timing, then, is immaterial. “A good time to buy any type of annuity is subjective, based on the client’s needs and objectives,” says Sutton White, head of annuity product development at Life Innovators in Cornelius, North Carolina.

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