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Whether savers or investors, people have been expressing general nervousness about their finances in light of the economic consequences of the upcoming presidential election. A lot of hyperbole is swirling about this election, with voters on both sides absolutely convinced there will be financial devastation if the other side wins.
The important thing to remember is that the market is not on the ballot! Neither Kamala Harris nor Donald Trump has any plans to make drastic changes to how the market works, and historically the market has not suffered regardless of which party ends up winning the presidency. Rather than making decisions about your money based on your views of the election, it’s better to make those decisions based on your goals and unique circumstances.
One thing everyone should consider while forming their financial plan is Federal Reserve policy: Could the Fed's announcement to cut target interest rates be a sign that the high-interest rate environment we've been experiencing for the past two years is beginning to wane? Understanding how interest rates affect our finances can inform how we make investment decisions: What should we consider now that rates appear to be on their way down?
For years, interest rates were extremely low. Mortgage rates below 4% were commonplace and car dealerships were offering 0% financing. That largely ended when inflation began climbing in 2022.
Many people think of high interest rates as a negative event, which can be true for some financial situations. Low-interest rate environments are preferred by those planning to buy a home or a car. Less often discussed, however, are the advantages high rates bring.
When rates reach the historic lows we experienced before 2022, savers suffer. Assets tied to interest rates such as certificates of deposit (CDs), savings accounts and annuities drop alongside Fed target rates. This lowers the rate of return for those “safe” investments, which in extremely low-rate situations can actually cause investors to lose buying power.
For savers, 2020 was a disappointing year. CD rates bottomed out at 0.10% while inflation averaged 1.21% throughout the year. It doesn’t take an economist to realize people who were invested in CDs in 2020 lost buying power!
Annuities weren’t quite as bad in 2020, but their rates were considerably lower than those available today. However, with the Fed set to lower target rates as many as three times by the end of 2024, and more potential rate cuts in the following year, savers may have a prime opportunity to take advantage of current rates before it’s too late.
Annuities are insurance products that pay a guaranteed amount over time. Tied to interest rates, annuities bought in high-rate environments generally pay more than the same annuity bought when rates are low. As interest rates climbed, so did annuity sales. The Life Insurance Marketing and Research Association noted a 23% sales increase in 2023 to a total of $385 billion, a trend the group predicts will continue in the coming years. But falling target rates mean if you are considering adding an annuity to your portfolio, now may be a good time.
For those who already have annuities purchased before interest rates began to climb, this is also a good time to take another look. Today’s annuities with their higher interest rates may be more favorable than those with lower rates from years past. These improvements must be weighed against surrender charges, fees, expenses and any time requirements — how long you must wait to begin receiving payments — with the new annuity. For many people, the top priority right now should be to consider replacing their low-interest annuities before rates drop.
As with any investing decision, choosing whether to invest in an annuity — and choosing which annuity to invest in — is complicated and should be done with the help of a financial professional who understands your individual situation and can tailor a plan to suit your goals and investing style.
Risk disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Jason LaBarge, financial advisor and president of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 443-647-4321
Securities offered only by duly registered individuals through Madison Avenue Securities LLC (MAS), member FINRA/SIPC. Investment advisory products and services made available through AE Wealth Management LLC (AEWM), a registered investment advisor. MAS and LaBarge Financial are not affiliated entities.
Annuity guarantees rely on financial strength and claims - paying ability of issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by carrier. Annuities are not FDIC insured.
AEWM does not offer insurance products. The insurance products offered by LaBarge Financial are not subject to investment adviser requirements.
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