Bond prices have tumbled, but annuity holders are receiving a higher payout rate
Might fixed-income investors be better off because of the worst bear market in history? It seems ludicrous to even ask. But if we compare our bond holdings today versus three years ago in terms of their annuity equivalents, we’re better off than when interest rates were at all-time lows in late 2020.
The good news in higher interest rates traces to their correlation with annuity payout rates, as you can see from the chart above. When rates were at or near their record lows in 2020, a 65-year-old male with $100,000 could purchase a “life & 10 years certain” annuity that provided a guaranteed income of around $450 per month for the rest of his life. Today, in contrast, $100,000 could purchase a guaranteed monthly income of around $620.
Consider an investor who held the Vanguard Total Bond Market Index Fund ETF BND. The fund’s objective, according to Vanguard, “to track the performance of a broad, market-weighted bond index.” A $100,000 investment in this ETF three years ago would be worth about $84,000 today, but that reduced amount could still purchase a guaranteed monthly payment of around $525 — more than the $450 monthly payment that could have been locked in three years ago.
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