We all know how to take advantage of lower interest rates when we have debt; However, because of current High Interest Rates, many of our clients are able to travel more, have fewer worries, and gain even more confidence in their decision to retire.
Before we discuss why and how this is happening, let’s cover three key topics:
1. Prior and current interest rates
2. What the “A” word actually means within the Investment world
3. What it means to “refinance” your retirement
1. For the past 16 years, interest rates have gone from record lows to multi-decade highs.
The Post-Recession Lows (2010-2019): To stimulate the economy after the 2008 financial crisis, the Fed funds rate was held near 0.00%-0.25%. The 30-year fixed mortgage rate fell from about 4.86% in 2010 to an all-time low around 3.31% later in the decade. The Fed slowly started raising rates in 2015 but never pushed them past the 2.5% before cutting them again in 2019.
Pandemic Emergency Lows (2020-2021): In response to the economic shutdowns of the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to 0.00%-0.25%. During this time, the average 30-year fixed mortgage rate plunged to a record low of 2.65% in January 2021.
Aggressive Hikes and Plateau (2022-2026): To combat surging inflation, the Federal Reserve initiated one of its most aggressive tightening cycles in history, pushing the fed funds rate to a target range of 5.25% to 5.50% by mid-2023. This sent mortgage rates soaring past 7%, leading to a plateau and slow easing where rates settled around 3.5% for the Fed Funds rate and range. Mortgages landed in the mid 6%.
2. The ‘A’ word refers to “Annuity”. It’s not a four-letter word, but it is often treated as if it were.
Since only 12% of the U.S. population has a pension, it’s fair to say that less than 12% of our clientele have pensions, but that doesn’t mean they don’t have the need for one. An annuity can create that lifetime income stream.
There are different types of annuities. Some annuities carry very heavy fees and can lose value in a down market, such as Variable Annuities. Other annuities have very low fees and prevent their owners from losing even a penny during the worst stock market possible – like Fixed Indexed Annuities.
In my opinion, Variable Annuities are the products that give the term “Annuity” a bad name. On the other hand, I feel the Fixed Indexed Annuity is one of the most powerful vehicles to have in a retiree’s portfolio.
We use Fixed Indexed Annuities to create a lifetime income stream for our clients that they cannot outlive.
The benefits that come with the Fixed Indexed Annuity are based on what the interest rates were when it was purchased. Generally speaking, higher interest rates can translate into stronger income benefits.
3. What it means to “refinance” your retirement
When we think of refinancing, we think of lowering our payments due to an increase in our credit rating or the lowering of interest rates. As mortgage rates drop, mortgage brokers are very busy refinancing homeowners’ loans to lower payments and hopefully keep more of their clients’ money in their pockets.
However, when rates increase, investors with safety on their mind turn to banks to lock in some 6-month to 1 year long CD’s.
Savvy investors will understand that even though you might get a 5% rate on a non-qualified CD, after the taxes are paid, it’s substantially less; therefore, they will turn to the Fixed Indexed Annuity. Annuities are tax-deferred by nature.
Many of these savvy investors who purchased their annuities during low-interest rate environments, from roughly 2010 to 2021, are coming back to ‘refinance’ their annuity and, in turn, “refinance their retirement”.
This process, sometimes referred to as “refinancing” an annuity, involves surrendering the current contract and using its value to purchase a new one (sometimes with the same insurance company) with improved benefits that reflect today’s higher interest rates.
I went back through the details of the 59 annuity replacements I have facilitated from November of 2024 to June of 2026. After replacing those policies, the average increase in guaranteed annual retirement income was approximately $3,000 per year. Over the next 10 years of their retirement, that’s roughly $30,000 in additional income per client. Across all 59 clients, that represents nearly $1.77 million in additional retirement income generated simply by taking advantage of today’s interest rate environment.
Not every client is a good candidate for a Fixed Indexed Annuity, but I find that most of my clients value a guaranteed income that they cannot outlive. Additionally, if an annuity owner passes away before using the full value of the contract, any remaining balance is generally passed on to their beneficiaries, something many traditional pension plans do not offer.
Fixed Indexed Annuities aren’t the only favorable type of annuity we use. MYGA’s (Multi-Year Guaranteed Annuities) can also add safety to a client’s portfolio. These are used as an alternative to a CD. Currently, CD rates in Maine hover between 3.5 and 3.9%, but don’t forget about the taxes that are due at the end of the year.
By comparison, many MYGAs currently offer rates between 5.5% and 6.5%, while also providing tax-deferred growth.
Every adviser at Northern Alliance Financial is a Series 65 Investment Adviser Representative. Investment Adviser Representatives are held to a fiduciary standard and operate under what’s called a ‘Best Interest Obligation’. This means whether we are speaking to a client or even a potential client, we can only make a recommendation if it is, in fact, in that person’s best interest.
If you have an annuity (Variable, Fixed or Fixed Indexed) and you purchased that policy when rates were low, it just may be worthwhile to see if it makes sense to refinance. It doesn’t mean replacing is the right choice for everyone, but it’s certainly a conversation worth having.