Annuity payouts are the highest they've been in years. Thanks, inflation.

By Brett Arends

A silver lining to the cloud of high interest rates

Blame the inflation panic caused by the war in Iran and the looming budget crisis caused by massive federal deficits.

Six months ago, a 65-year-old woman who retired with $100,000 in savings could secure herself a guaranteed monthly income of $593 for life, an annual payout rate of 7.1%, according to Cannex, an analytics company that reports data on the market for annuities, lifetime income products offered by life insurers.

A woman of the same age retiring today would get considerably more - as much as $632 a month, or a payout of 7.6%, according to immediateannuities.com.

That's the highest rate since the financial crisis 17 years ago and almost one and a half times as much as the payout rates available at the lows just after the COVID-19 crisis.

And a man of 70 could today lock in a lofty payout rate of 9.3%, also the highest in about a generation, and vastly higher than he could have gotten just last fall.

All of which goes to show that there are few clouds without a silver lining, including the cloud of higher interest rates. High rates are bad for anyone hoping to buy a home with a fixed-rate mortgage or looking to borrow money, including companies that want to invest in their business. They are also bad for the U.S. government. But they are bringing benefits for those who are retiring and want to secure a guaranteed lifetime income.

Read: Mortgage rates jump to over 6.5% - the highest level since the Iran war started

The yield, or interest rate, on the benchmark 10 year U.S. Treasury note BX:TMUBMUSD10Y, which was 3.6% in September 2024, is now 4.57%, after hitting 4.66% on Tuesday. Blame the inflation panic caused by the war in Iran, and the looming budget crisis caused by massive federal deficits.

There are no guarantees that yields, and annuity payout rates, won't rise even further. Insurance industry analysts say that annuity rates are driven by interest rates on investment-grade corporate bonds as well as U.S. Treasury bonds, and the rates on corporates haven't yet risen as much as those on Treasurys.

Annuities are products sold by life-insurance companies that convert a lump sum into a guaranteed income for life. They are the closest way to convert current "defined-contribution" retirement plans, such as 401(k)s and IRAs, into the equivalent of an old-fashioned pension.

And because of the so-called mortality credits - meaning that people who buy annuities and die young subsidize those who buy them and live longer - annuities are the simplest way to squeeze the most guaranteed lifetime income out of a sum of savings.

They have their downsides, including the loss of liquidity, the loss of bequest and vulnerability to inflation. These in part help explain why they remain a niche product, even though millions of people are retiring and complaining that they worry they won't have enough income for their golden years.

One way to handle inflation fears is to buy annuities with an annual increase in payment.

Someone retiring today at the Social Security's full retirement age of 67 and purchasing an annuity with a 3% annual increase would get an initial payout rate of around 6.2%. (The rate would be slightly lower for a woman, because women typically live longer, and slightly higher for a man).

That easily beats the 4% or 4.5% supposedly available through other strategies.

Sales of these single-premium immediate annuities rocketed 22% in the first quarter of the year, according to insurance industry data. But they still came only to $3.7 billion, a trivial figure in a country where record numbers pf people are turning 65 every day and wondering how to get the most retirement income out of their savings.

If interest rates continue to rise, expect sales to follow suit.

-Brett Arends

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05-23-26 0949ET