aving for retirement can be very difficult because of longevity risk – that is, the chance that you might live long enough to outlast your savings. The traditional solution has been an annuity, which transfers the longevity risk to an insurance company and pays you an income for the remainder of your life. However, annuities have a hidden drawback: They lock in the interest rate prevailing when you buy them. At present, that makes them a lousy deal. Luckily, we have a better strategy that’s simple to employ and can ensure income for years to come…
The strategy is pretty straightforward: buying dividend stocks and waiting for rates to improve. You see, not only do low interest rates adversely affect annuity rates, but the longer low rates persist, the worse the effects get. That’s because insurance companies use a mix of historic and projected returns when setting annuity rates. When rates stay down for more than six years – as at present – the interest rate swaps used by the insurance companies run off and interest rates get steadily worse. Low interest rates affect annuity rates in two ways. For immediate annuities, they reduce the amount of annuity purchased for each $100,000. For deferred annuities, their effect is even more pernicious, because their compounding effect extends throughout the deferral period.
Source: Wall Street Daily
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