While your portfolio may become more valuable if and when interest rates decline, it won’t necessarily buy you any more retirement financial security, columnist MktwHulbert writes.
Consider rising interest rates, which most retirees and near-retirees are upset about since they are a big reason why their stocks and bonds have suffered significant losses so far this year. Yet investors may be overlooking a counterbalancing positive effect of those higher rates: Because of them, you now can purchase a better annuity payout than you could have previously.
This is the flip side of the argument I made a couple of years ago when interest rates were coming down. At that time, you may recall, I pointed out that while those declining rates helped to increase the value of your stock and bondholdings, they also meant that a given annuity payout was becoming more expensive.
The accompanying chart illustrates the rough equilibrium that exists between interest rates and annuity payout rates. Notice that these payout rates are highly correlated with Moody’s AAA Corporate Bond yield. In 2020, when that yield got down to close to 2%, a 65-year old male investing $100,000 in an annuity could have secured a payout of approximately $450 per month, according to www.ImmediateAnnuities.com. Today, with that yield 1.
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