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3 Key Retirement Decisions Affected By Higher Yields

How to factor in higher rates when deciding whether to purchase an annuity or buy long-term-care insurance.

An illustrative image of Christine Benz, director of personal finance and retirement planning of Morningstar.

The relationship between higher yields and retirement portfolio planning—return expectations, safe withdrawal rates, and asset allocations—is fairly direct and intuitive. As I wrote last week, higher inflation-adjusted yields on safe assets nudge up the long-term return prospects for bonds and cash, and in turn contribute to higher starting safe withdrawal rates. The availability of safe, stable cash flows from bonds argues for more conservative portfolio positioning for retirees who prioritize stability in their year-to-year portfolio cash flows.

But the implications of higher yields for retirement portfolio planning don’t stop with portfolios. Higher interest rates have implications for almost every other financial aspect of retirement planning, too.

In the realm of insurance products, the payouts on fixed annuities have become more favorable, though would-be annuity buyers still need to weigh the loss of liquidity and inflation risk alongside the benefit of locking in higher lifetime income. Long-term-care insurance policy pricing, meanwhile, is a mixed bag. Prices on pure long-term-care insurance have gone up over the past few years, notwithstanding higher yields, but the pricing of hybrid-type long-term-care policies has shown a modest benefit from higher rates. Meanwhile, the decision about whether to delay Social Security filing—while still advisable in many situations—is less clear-cut than it was when yields were lower.

Here’s a closer look at how higher yields affect each of those three areas.

Decision 1: Whether to Buy an Annuity for Retirement Income

The attractiveness of annuities varies over time. When prevailing interest rates are lower, payouts suffer, and they get a boost when they’re higher because the insurance company can earn a higher return on contract holders’ funds. That’s because insurance companies invest the bulk of their capital in bonds and cash. So, when bond yields go up, insurance companies can afford to boost payouts for new buyers. A 70-year-old male who put $100,000 into a fixed annuity in 2019 would have received a monthly income of $600 over his lifetime, according to immediateannuities.com. More recently, that same $100,000 would translate into a monthly payout of more than $700 for a 70-year-old male annuitant.

Of course, bond yields have gotten more attractive at the same time. And in contrast with annuities, investors in bonds maintain access to their principal. Bond buyers are also able to obtain direct inflation protection thanks to the availability of I bonds and Treasury Inflation-Protected Securities. There aren’t currently any annuities whose payouts are linked to the Consumer Price Index, and annuity buyers who opt for inflation protection pay dearly for it. The same $100,000 annuity for a 70-year-old male would translate into a monthly payout of about $540, assuming he added an annual inflation adjustment of 3%, versus $700 per month for the annuity without the inflation rider. As John Rekenthaler has written, a retiree could generate a stable stream of inflation-adjusted cash flows by building a laddered portfolio of TIPS bonds and spending through it. Such an investor would have at least some liquidity, the protection of government-issued bonds, as well as inflation protection. However, the bond buyer wouldn’t have the higher stream of income for life, unlike the annuity buyer today.

Takeaway: For investors who want to lock in today’s higher yields in perpetuity—perhaps to cover basic expenses with a combination of Social Security and annuity payments—annuities look much more attractive today than they did a few years ago. And I continue to believe that a one-and-done financial decision like an annuity purchase can help give retirees psychological “permission to spend” (or to gift) in a way that spending or gifting from their portfolios may not. Just be sure to purchase from a top-rated insurance company.

Decision 2: Whether to Purchase Long-Term-Care Insurance

Just as higher yields allow insurance companies to offer more-attractive annuity payouts, they also have the potential to improve the pricing of long-term-care insurance. Ultralow yields in the two decades leading up to rates’ sharp ascent in 2021, combined with insurance companies’ unexpectedly high claims payouts, led insurance companies to hike long-term-care insurance premiums for new buyers as well as for people who already had policies. Many insurers exited the market so that in 2023 just six companies continued to provide pure long-term-care insurance, according to the American Association of Long-Term Care Insurance.

Higher yields haven’t yet translated into lower premiums for pure long-term-care policies; in fact, rates have gone up. A 55-year-old male purchasing $165,000 in long-term-care benefits would have paid an annual premium of $1,710 in 2020, according to Jesse Slome at the American Association of Long-Term Care Insurance. In 2024, a premium for the same individual on the same type of policy would cost $2,075, according to Slome’s data. Slome conjectures that the increase owes to the fact that some of the cheapest policies available four years ago are no longer available.

The market for hybrid long-term-care insurance products—life insurance products with long-term-care insurance riders—is larger than the market for pure long-term-care insurance, and it’s growing. And pricing on hybrid policies would seem to be more directly affected by rising interest rates. That’s because, in contrast with pure long-term-care insurance, which typically requires a stream of policy premiums over time, hybrid policies typically require a lump-sum purchase or premiums over a specific time period, such as 10 years. That structure gives the insurance company more certainty about the investment return that it’s apt to earn on the insured party’s premiums and in turn more certainty that it has appropriately priced the contract. Damon Gonzalez, a certified financial planner with Domestique Capital in Plano, Texas, says that premiums on hybrids have declined somewhat over the past few years but not as much as one might have expected given higher yields. For example, a policy that he priced for a client in 2017 would have a premium of about 7% less today. Pricing has improved most significantly for lump-sum policies versus those that entail premiums over a multiyear period, Gonzalez says. That said, historical data on life/long-term-care pricing is scant.

Takeaway: While rising rates have led to modest improvements in hybrid products’ pricing, the products’ optionality remains the key selling point After all, everyone is going to die, and some of us will need long-term care before we do. They can also be a good solution option for older adults who already have whole life insurance and want to trade into a hybrid life/long-term-care policy. (Such a maneuver can be tax-free using what’s called a 1035 exchange.)

Decision 3: Whether to Delay Social Security

The value of delaying Social Security has long been one of the most bulletproof pieces of advice in retirement planning, and the advantages of delayed filing only grew as the safe yields on guaranteed investments declined. That’s because Social Security recipients receive a boost in their eventual benefits for every year they delay up to age 70. For married couples, the higher earner’s benefit remains with the surviving spouse even after the higher-earning partner dies.

Notwithstanding the frequently cited assertion that you gain 8% per year in increased benefit for every year you delay past full retirement age, the value of the delayed filing—and those eventually higher benefits—varies based on how long you live. The single person who delays until 70 and pockets the higher benefit for another 30 years, for example, will have received a much higher “return” from delaying than the one who delays until 70 and only lives to be age 75. Mike Piper, creator of the Open Social Security tool for Social Security claiming strategies, says that the annual percentage increase that one receives for delaying from age 62 to age 70 is 7.4%.

When yields were very low, that made the case for delayed filing look even stronger. That’s because whatever “return” you pick up for delaying is both guaranteed and inflation-adjusted. When nominal bond yields were 1% to 2%, it was all but impossible for early claimants to come close to that guaranteed “return” by investing in the market.

Now that yields are higher, though, the fight isn’t quite as lopsided. The real yield on 10-year TIPS—arguably the closest proxy for the guaranteed real return you earn by delaying—is just under 2% today. (Stocks’ long-run returns have been higher, of course, but they’re neither inflation-adjusted nor guaranteed.) Meanwhile, based on average life expectancies, Mike Piper estimates that for an average unmarried male, the expected return from waiting to file for Social Security works out to about 1.8% above inflation. For an average unmarried female, it’s about 3.0% above inflation. For people who expect to have longer-than-average life expectancies and/or have younger partners who will see a higher benefit from a delayed filing decision, the payoff for waiting would be correspondingly higher.

Takeaway: The fact that safe assets are yielding more means that taking a benefit earlier and investing the money is a little less unreasonable than it once was. But delaying Social Security is still a good idea in a lot of situations—especially for the higher earner in a married couple, single people with average or greater life expectancies, or those who aim to enlarge lifetime benefits for their households. You can run the numbers based on your own Social Security earnings history and your spouse’s, factoring in your respective health histories, on Open Social Security.

Correction: A previous version of this article stated that Social Security recipients receive a boost in their eventual benefits for every year they delay past age 70. This has been corrected to say that recipients get a benefits boost for every year they delay up until age 70.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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