How higher interest rates affect annuity pricing

Interest rates have been climbing all year, and last week the Federal Reserve raised its own rate for the first time since 2023. Most of what gets written about a move like this concerns stocks and mortgages, but there is a consequence for people approaching retirement: the price of buying guaranteed lifetime income has changed, and it has changed by more than the headlines suggest. This article measures that change at every age from 60 to 80, and then works through the harder question of who should care.

What actually moved?

Corporate bond yields, by about one full percentage point over twelve months. We use the effective yield on single-A rated US corporate bonds as a proxy for the bonds insurers hold to back and price their annuities. That index was at 4.62 percent a year ago, bottomed at 4.53 percent last October, and closed at 5.60 percent this week. It is a better guide than the Federal Reserve's own rate, because the price of the income insurers sell is based on what their bond portfolios earn rather than on overnight rates. Bond yields are not the whole of it, though. An insurer's quote also reflects its mortality assumptions, expenses, capital requirements, credit risk and profit margin, so read the yield as the part of the price that moved this year rather than as the price itself.

Two details are worth knowing. The first is that almost all of the increase is in the underlying government curve rather than in credit risk: over the same year the 10-year Treasury went from 4.06 to 5.01 percent, while the extra yield investors demand for holding single-A corporate debt instead of Treasuries moved only from 0.63 to 0.66 percentage points. When an increase comes from the government curve rather than from credit risk, an income buyer can actually capture it, rather than it being payment for taking on more risk of default.

The second is that a disproportionate share of the move happened over the last few weeks. Roughly four tenths of the twelve-month move arrived after August 25, running through the August inflation report on September 11, the Federal Reserve's quarter point increase on September 16, and the 10-year Treasury briefly crossing 5 percent for the first time since 2007. So the move is a year in the making, but it accelerated recently, and the current level is the highest either series has reached in two years.

How much does pricing change when rates go up by one percentage point?

At 65, about 8 percent more income for every dollar you hand over. We priced a single life immediate annuity at both ends of the move, which is the simplest form of the contract: payments start at once, stay level for the rest of your life, and stop when you die, with no refund and no guaranteed number of payments. Stripping out those features is exactly what makes this version pay the most. Insurer quotes move with the bond market but not one for one with it, so read the 8 percent as the change in the underlying economics rather than as a promise about any particular quote. A 65-year-old man putting in $100,000 would have been quoted around $7,245 a year before the rise and $7,843 a year after it. On a $250,000 premium that is the difference between $18,112 and $19,608 a year, so just under $1,500 a year more, for life, on the same money.

The same arithmetic runs the other way and is possibly the clearer framing. Last September, $18,112 of annual income required a premium of $250,000. Today that same income requires $230,922, roughly $19,000 less.

Why does age change the answer?

Because a younger buyer is paying for a longer stream of future payments, so the interest rate applies over more years. The size of the gain falls steadily with age: a 60-year-old man gets 9.4 percent more income from the same one percentage point rise, a 65-year-old gets 8.3 percent, a 70-year-old 7.1 percent, and an 80-year-old only 4.6 percent. Women see slightly larger gains at every age for the same reason, since they live longer on average and are therefore buying a longer stream.

Couples gain the most of the cases we priced. A joint policy that keeps paying in full until the second of two people dies is the longest of these streams, so it is the most sensitive to interest rates: for a 65-year-old man and a 63-year-old woman, income is 10.1 percent higher after the same one percentage point increase, $6,382 per $100,000 rather than $5,796.

Who is this actually for?

An annuity suits some households well and others poorly, so it is worth being precise about what the product does before deciding whether the improved pricing matters to you. An income annuity is not an investment, and the 7.8 percent payout on offer at 65 is not a return of 7.8 percent. Each payment draws on three things: your own premium coming back to you, the interest the insurer earns on that premium while it holds it, and the share released by the people in the pool who die earlier than expected. The first two you could arrange yourself. The third is the part a portfolio cannot reproduce, and it is what you are actually buying: insurance against living a long time.

This explains both the appeal and the cost. On the Social Security Administration's population tables a 65-year-old man lives to about 84 on average and a 65-year-old woman to about 87, and for a couple aged 65 and 63 there is roughly a two in three chance that at least one of them reaches 90. Those are averages across the whole population rather than a forecast for one person, and someone in good health should expect to do better. There is an enormous range around those averages, and that range is the problem you cannot solve by saving alone, because you have to fund a retirement that might last 20 years or might last 35 and you do not get to know which. An annuity converts that unknown into a known payment. In exchange you give up the money itself: at this week's pricing a 65-year-old needs to live about 13 years, to roughly age 78, before the payments have returned the premium in plain dollars, and if you die earlier than that the remainder stays with the insurer and funds the people who live longer. That 13 years counts dollars only, and ignores what the premium could have earned had you kept it invested, so treat it as a rough marker rather than the point where you come out ahead.

That trade is the reason many people who buy lifetime income buy it for part of their savings rather than all of it. One common approach is to add up what you spend on the things you cannot skip, subtract the guaranteed income you already have from Social Security and any pension, and consider covering some or all of the remaining gap with lifetime income, leaving the rest of your savings invested and available. Doing it this way protects the floor of your retirement against both a long life and a bad market, while the money you did not annuitize keeps its upside and stays yours. For most households, annuitizing everything gives up more flexibility than the protection is worth, and it leaves no reserve for the expenses that do not arrive on schedule.

There are also households for whom this is the wrong tool entirely, and the clearest case is a strong desire to leave money behind. A plain income annuity pays nothing to your heirs, and while you can buy a version that guarantees payments for a set number of years or refunds the unused premium, each of those features reduces the income you receive, which is another way of saying you are buying back some of what made the annuity efficient in the first place. It is usually the wrong choice in three other situations as well: already having enough guaranteed income to cover essential spending, since the problem is already solved; being in meaningfully worse health than average, since the price assumes average mortality and a shorter life means subsidizing everyone else; and needing the money to stay reachable, since once it is annuitized it is gone.

Inflation is the other thing to weigh, because the figures above are all for level payments that stay the same in dollar terms for the rest of your life. At 3 percent inflation, income that starts at $7,843 has the buying power of about $4,350 after 20 years. This is where the money you did not annuitize matters, since stocks and real estate have historically grown roughly in line with inflation over long periods while a level annuity payment does not, so the two halves of the plan cover different risks. Insurers do sell versions that rise each year, and in our pricing a 2 percent annual increase reduces the starting income by about 16 percent, to $6,607 per $100,000 rather than $7,843. Whether that is a good trade depends mostly on how long you expect to collect, but the choice is worth making deliberately rather than by default.

Practitioners and the academic literature land on much the same profiles, so it is worth setting the pricing aside and stating them plainly.

So is now a good moment?

Pricing is better than it has been in two years, which is a statement about today rather than a forecast. The Federal Reserve's own projections suggest one more increase before the end of the year, and if that happens income pricing may improve a little further, though the market has had plenty of time to anticipate it and bond yields already reflect what investors collectively expect. Waiting is not free either, since the months spent waiting are months without the income. It is worth resisting the urge to read a plan-level decision off a single stretch of market history: the useful conclusion is that a household that had looked at guaranteed income a year ago and found it unconvincing is now looking at a materially different price, not that anyone should be timing a purchase.

A last note on what these numbers are. They come from our own pricing model rather than from any insurer, they assume average health, and insurer quotes vary between companies and lag moves in the bond market by weeks. Treat them as a measure of how much the underlying economics shifted, and get actual quotes before acting on any of it.