Risk-averse investors dive into low-rate annuities: Stop the madness!
USA Today recently reported that "Fixed annuity sales jumped 74%, to $35.6 billion, the highest ever, for the three months ended March 31, the most recent data available from insurance consulting firm Limra."
The fixed annuities are popular because savers can't get good rates on money market accounts or CDs -- thanks to Uncle Ben's "We shall punish people who have the nerve to save their money!" fiscal policy. With five-year CDs yielding around 2% and money market accounts hovering around 1%, the 3.3% to 3.5% rates offered by annuities seem attractive.
The downfall is that you have to lock up your money for five years at an interest rates that could look appallingly low if interest rates soar the way that many, many very smart people expect that they will.
Unless you really, really desperately need to earn that extra 2% on your money, I think it makes more sense to use a money market account for now. Locking in a 3.3% rate for five years is still a very bad deal by historical standards -- and the federal printing presses are running on overdrive, suggesting that rates will have to head up soon.
Basically, locking into a five-year commitment to very low interest rates to avoid pitifully low interest rates doesn't seem smart to me. If you possibly can, I think it's better to stay liquid and prepare to lock in when rates start to move up again -- as they inevitably will.