Two and one-half years of historic low interest rates have faced individuals with the puzzling question of, “Should I lock in a low rate today or wait for a better rate later?” The question of whether or not to lock a rate in today and how long to lock it in has always been a difficult choice. No one knows with certainty when and where interest rates will go. In an unprecedented announcement, however, the Federal Reserve has made this decision much easier and provided some clarity into the future. On August 9th 2011 the Federal Reserve released an announcement stating they are likely to keep rates low through mid-2013. With this announcement it is likely we will experience at least another two years of a low interest rate environment. With this knowledge in hand one must form a game plan on what to do with their safe money.
Savings accounts, checking accounts, and money markets continue to pay next to nothing in the way of interest. Treasury bond yields have fallen so low that there is daily talk of a bond bubble. Short-term CD rates are so low the rates are almost indistinguishable in comparison to a savings account. To find any type of yield one must be willing to lock in a rate for multiple years, which begs the question, “Should I wait for a better rate?”
The Fed has given us a two-year free pass knowing rates will remain low. If we were to compare the option of locking in today’s five-year fixed annuity rate available at 2.90% vs. a one-year fixed annuity rate currently available at 1.5% to wait for a better rate we will see the longer we wait for better rates the more difficult it becomes to catch up.
|5-year @2.9%||1 year @1.5%||Rate needed to catch up|
|Year 1||$102,900||$101,500||Fed free pass|
|Year 2||$105,884.10||$103,022.50||3.9% for 3 years|
|Year 3||$108,594.73||$104,567.83||5.1% for 2 years|
|Year 4||$112,114.42||$106,136.35||8.7% for 1 year|
|Year 5||$115,365.74||$107,728.40||Both are free of surrender|
The table above demonstrates the longer we wait at low short-term rates the increasing likelihood of never being able to get a rate high enough to catch up. Too many people have been waiting for the past two and one-half years already and will now be waiting another two years for better rates. It is unlikely they will ever catch up to the opportunity of what they may have earned. Don’t play the waiting game and lose out. Use our calculator “The Waiting Game” at www.annuityreserve.com to examine your own situation using fixed annuities or CD’s. You may contact one of our experts for an individual consultation by phone at 1-800-866-8780.