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Low yields have important implications for retirement strategies. One example is the decision of when to purchase an annuity.1 Despite the fact that interest in guaranteed income has risen, demand has declined significantly since the onset of the pandemic.

Single-premium immediate annuities (SPIAs) have interest rate exposures similar to a long-duration bond, and a rise in interest rates can increase payouts. Therefore, retirees who are interested in additional guaranteed income2 might delay the SPIA purchase in the hopes interest rates and payouts rise.

This article explores the trade-offs associated with the decision to delay an annuity purchase – in particular the interaction between changes in bond yields and assumed portfolio rates of return, and the impact of mortality improvement.

After crunching some numbers, I find that the “cost” associated with delaying an annuity purchase varies. For super-conservative investors (e.g., those who would invest entirely in government bonds) and older annuitants (age 75-plus) delaying the annuity purchase doesn’t make much sense, even if rates do end up rising; it’s better to go ahead and buy the annuity now. However, to the extent the investor expects to realize a higher return (e.g., by investing in risky assets) or bond yields to rise, or if the investor is younger (under the age of 65), delaying the annuity purchase is the smart move.

It’s impossible to know where the markets are headed, though, so the best strategy for retirees to increase guaranteed income is “dollar-cost averaging,” where annuities are purchased over time. This reduces the regret associated with future changes in rates and ensures the household has a plan to generate consistent lifetime income.