When the Federal Reserve changes interest rates, it affects far more than Wall Street. It reaches into your savings account, mortgage, business loans, and yes—annuities. Understanding how rate cuts ripple through the economy can help you make smarter choices with your retirement money.
Why the Fed Cuts Rates
The Federal Reserve uses interest rates to manage the economy. But the Fed doesn’t control rates with a magic switch. Instead, they adjust the money supply.
- When money supply increases (quantitative easing): More money is available for lending, so the cost of borrowing goes down. This pushes rates lower.
- When money supply shrinks (quantitative tightening): Money becomes harder to get, so the cost of borrowing rises. This pushes rates higher.
Rate cuts are usually made when:
- The job market slows down
- Inflation pressures ease but still remain sticky
- Unemployment risks rise
- Fed governors see warning signs in the economy
In short, rate cuts are meant to make borrowing cheaper and keep businesses and consumers spending.
How Rate Cuts Affect the Broader Economy
Lower rates create winners and losers.
Winners include:
- Home buyers: Mortgage rates often drop, making loans cheaper.
- Builders: Easier access to financing can increase housing supply.
- Small businesses: Cheaper loans help them expand.
- Banks: They can pay you less on CDs and savings while still charging borrowers interest.
Losers include:
- Savers and retirees who rely on safe returns.
- People using CDs, bonds, and money markets for steady income.
Here’s a quick view of how it plays out:
| Group | Effect of Fed Rate Cuts |
| Home Buyers | Lower mortgage rates, easier to buy or refinance |
| Small Businesses | Easier access to loans for growth |
| Banks | Bigger profit margins, lower CD and savings payouts |
| Retirees & Savers | Lower yields on safe products like CDs and annuities |
Why Retirees Feel the Pain
If you are retired or close to it, you’ve likely noticed this firsthand. When rates drop:
- CD and bond yields go down.
- Money markets return less.
- Insurance companies earn less on their bond holdings.
That last point matters because annuity companies invest heavily in bonds. If they earn less, they pass along lower returns to policyholders.
This doesn’t mean annuities stop working. But it does mean the benefits they can offer—especially in fixed interest annuities—shrink when the Fed cuts rates.
How Fed Rate Cuts Affect Annuities
Annuities are tied to the bond market. When the Fed cuts rates:
- Fixed annuities (MYGAs): Yields drop. For example, MYGAs once paid as little as 2% during low-rate years but rose to 6% when rates peaked. With cuts ahead, we may see them move lower again.
- Income annuities: Payouts depend on both age and interest rates. Cuts reduce the rate component, which can lower future income offers.
- Indexed annuities: Still tied to bond returns. Cuts may shrink caps and participation rates over time.
The impact isn’t instant. Annuity companies often delay changes, but the trend follows the Fed.
What This Means for Retirement Planning
For retirees, lower rates bring a tough choice:
- Accept lower guaranteed yields, or
- Take on more risk to chase higher returns.
Neither option feels great. That’s why timing matters. Locking in higher annuity rates before cuts take hold can preserve income for years to come.
Here’s the balance:
| Annuity Type | Effect of Rate Cuts | Notes |
| Fixed (MYGA) | Lower guaranteed yields | Best to secure rates before cuts |
| Income Annuity | Lower payout factors | Age helps, but cuts still reduce income |
| Indexed Annuity | Lower caps/participation over time | Lagged effect but still impacted |
Why Timing Matters
Fed decisions are outside your control, but your response is not. Rates have already pulled back from their highs. While no one should rush into a decision, sooner is often better when it comes to locking in annuity guarantees.
Waiting until after multiple cuts could mean missing the best offers. That’s why understanding how Fed rate cuts affect annuities is key to making retirement money last.
Next Steps
If you’d like to see how annuities could fit into your retirement plan before rates move further, I can help.
- Schedule a short Zoom call with me to get your questions answered.
- Or, watch my video series 20% More Spendable Income in Retirement for real-world examples of how annuities can work in a retirement strategy.
I specialize in annuities every day—not as a side business, but as my main focus. Let’s make sure your retirement income strategy is ready for the next move from the Fed.
Podcast Episode 85: How Fed Rate Cuts Affect Annuities
Download Podcast Episode 85: How Fed Rate Cuts Affect Annuities on Apple Podcast