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Is It Time to Refinance Your Retirement?

How many times have you refinanced your home due to dropping interest rates? Why did you do it? Was it because the rate was so good you could not resist? Not really, you were looking for an outcome. Better cash flow, better accumulation of equity.


The economics of the falling interest rate provided an opportunity.


Now are there similar opportunities due to the aggressive increase in interest rates?


Certainly not in the real estate refinance market.


But how about your retirement?


Maybe the time is right to put money in a money market account. As of today, a quick look at www.Bankrate.com reveals you can get 4.5% to 5% on money market accounts.


How about long-term bonds?


Ready for a peek behind the scenes. Guess who is snapping up a bunch of these long-term bonds. Insurance companies and pension funds. This is good news. For people who have a pension, this is providing some much-needed relief for their portfolio management models as they can lock in long-term bonds and the yield.


Let’s talk about why it is good news for you that the insurance industry to be buying long-term bonds at the current rates. It is good news because that provides similar relief to their portfolio management models (after all, many of them are the providers of the pension payments – for example Athene…


Here is what that means to you and your clients. Many of them have purchased annuities during the same low-interest rate era that refinancing of the house made financial sense. Unfortunately, that low-interest rate era has led to some underperforming annuities.


Now, with the high interest rate environment, many insurance companies are providing an opportunity to refinance out of these underperforming annuities providing various combinations of:


  • An upfront bonus of account value to overcome surrender charge in moving out of the old annuity to an annuity that takes advantage of this new high interest rate environment.

  • An increased potential growth rate through greater participation in the crediting index

  • An increased lifetime income payout on a yearly basis.


Of course, just like refinancing the house, this may not be the right move. Refinancing the house had transaction costs in the form of closing cost as well as potentially re-starting the amortization schedule back to square one on a 30yr mortgage. Refinancing an existing annuity potentially has surrender fees that reduce the account value as part of the process, the new annuity may extend the length of time before the fund can be liquidated without charge, and the amount of lifetime income may be impacted.


The ultimate question is whether or not the refinance of the annuity makes sense for the client’s particular facts and circumstances.


It is easy enough to find out whether it is right for them.


Just like the person who is sitting happy that they refinanced into the 3% rate and the house payment they are making, one may look back on this window of opportunity in the future and be glad they made a change. A change in this instance may lead to increase in their savings and their income, and they can lock it in now.


Changing economic conditions present both challenges and opportunities. A true financial advocate for their clients keeps modifying the plan as needed to deal with the challenges and take advantage of the opportunities.

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