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Rates are so low.....time for the "A" word? Thumbnail

Rates are so low.....time for the "A" word?

Rates are so low..…time for the “A” word?

The dreaded “A” word…. Annuities.

The Civid-19 outbreak has shown us once again – whether one is a republican or democrat – that an equally appealing option to deal with a weak economy is to lower interest rates.

So, here we are with incredibly low interest rates.   So low, many will claim they cannot go lower.  I think I heard the same whine back in 2002 and 2008, yet here we are.

How low can they go?  We have never seen it in our lifetimes, but they could go negative.   And boy will that mess with our economic system.  In the meantime, we must manage our portfolios with very low yields on fixed income instruments.  What to do?

This brings us to Annuities.  Normally, I hate the word because it is associated with hidden fees, tax promises, and salesmanship. Lots of salesmanship.  However, Annuities (and I am talking Immediate Pay Fixed Annuities only – as plain vanilla as you can get) do offer something you cannot find in a fixed income security….…mortality credits.

Mortality Credits is just a fancy actuarial term to help one understand that when you buy an annuity, you are buying along with many other folks and entering a risk pool.

This risk pool is a good thing from the perspective of an annuity buyer.  The insurance company will make an estimate as to the “average” lifespan in the pool and can issue annuities that pay for your entire lifetime.  This will work out great if you live for many years, but not so great if you pass before the “average” lifespan.  This is risk pooling/sharing at work.

The result is that the insurance company can offer a more generous yield than you can find by investing in the bond market.   It is not magic. It is not investment acumen.  It is mortality credits.

As with almost anything in life, there are two sides to the same story.  Normally the negatives of annuities often outweigh their positives.  However, with yields dropping to such low levels, the positives of mortality credits may tip the balance back in favor of an appropriate allocation to annuities.  (It all depends on your unique situation.)

So please do not have a preconceived notion about this investment option (annuities).  The risk return balance among financial instruments may have changed, and it may be time to look outside the box and look at the “A” word. 


This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. The views expressed are those of Southern Investment Management Collective (SIMC) and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. SIMC, nor any of its members, are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. Investment advisory services offered through Mutual Advisors, LLC DBA Southern Investment Management Collective, a SEC registered investment adviser.


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Description automatically generatedAbout the Author:  Kent Fisher, CFA, CFP®

Kent Fisher is a Chapel Hill, NC Fee-Only Comprehensive Wealth Manager at the Southern Investment Management Collective (SIMC).  SIMC provides comprehensive financial planning, retirement planning and investment management services to help clients organize, grow and protect their assets.  SIMC serves clients as a fiduciary, and tailors all solutions to each client's unique situation