If you are trying to live on your income from investments at the bank you are probably having a hard time right now. If you have a large savings account at the bank you have seen the rates stay low and guess what? They are probably not going to get much better any time soon.
The good news is that a somewhat complicated phenomenon is happening right now with rates and yields that is a major benefit if you know how to take advantage of it. While bank rates are still very low and are not likely to go up much, yields on fixed annuities and treasuries are decent right now.
Why are the yields better? There are two main reasons. One is complicated and one is not. Insurance companies that offer annuities have much more buying power than we do as individuals. What does that mean? They get better deals! Think of it like Wal-mart getting a better price for their products than we do. It’s not complicated.
The other reason is that treasury yields are interesting right now. As the government’s credit rating becomes weaker the prices drop on treasuries. To understand why this is so significant remember that bond prices work in opposite with yields.
If you purchase a new issue of a bond, usually you get it for 100. That means if you get one bond you pay $1,000. Let’s say your bond was paying 4%. This is a great rate for right now but in a few years it might not be. Imagine if the rates went to 6% for the exact same kind of bond that you own that is paying 4%. Are they worth the same amount? Why would you ever buy a 4% bond when you could get 6% for the same bond?
Since they do not have the same value the 4% bond is lowered in price. The 6% bond is still selling for $1,000 even but the 4% bond may drop in price to $800, just for example purposes. The actual calculation is complex. It works in opposite as well if rates go down.
Now, if rates go down and you can only get 5% bonds that are the same quality, the 6% bond would be worth more. The price might go up to $1,200. This is a good lesson to learn if you buy bonds. When rates go up your bond values go down. When rates go down, you bond values go up. Your interest rate doesn’t change so if you are not selling your bond anytime soon there is no need for concern, kind of. With rates so low right now, buying bonds is a losing bet because rates are sure to go up eventually.
The complicated part with bonds and treasuries is that the above rules don’t always apply. When a company has problems their bond prices can drop even though the normal interest rates haven’t changed. That is exactly what has happened with treasuries as of late. Why? The government’s debt is not as secure as it used to be. However, it is still safe because treasuries are backed by the taxing power of the government.
So treasury prices have fallen and rates have stayed the same. That means you can now purchase the same product at lower prices! What a deal! Annuity companies have figured this out long before any of us financial advisors. That is why annuity rates are better right now. They can invest millions of dollars in higher paying rates and subdivide them into various terms with annuities. They pass along the higher rates to investors.
Are you happy with your rate at the bank? If not, consider fixed annuities. Annuities offer many benefits as well as higher rates. More importantly, they can get your retirement income back on track right now.
