Can I Get ‘Out’ of a Fixed-Rate Vehicle?
Have your question answered on the Money Wisdom Question Series!
When you lock into a fixed-rate vehicle like a CD, fixed annuity, or fixed-indexed annuity, you’re committed to a specific interest rate for a set period. But what happens when after a few years, rates are higher, and you want to opt out of that commitment?
In this week’s Money Wisdom Question Series, join Nicholas J. Colantuono, CFP® as he explains what your options are when getting out of a fixed-rate vehicle and into something better.
Understanding Fixed-Rate Vehicles
Fixed-rate vehicles are interest-rate-sensitive investments, meaning the return you earn is tied to the rates available when you purchase them. Back when rates were lower in 2020 or 2021, you might have locked in a 3% or 4% fixed interest that now feels less attractive compared to today’s higher rates. But before you take advantage of a more favorable situation, you must consider the potential costs of breaking this commitment early.
Penalties and MVAs
Many fixed-rate vehicles come with surrender charges, penalties, or what are known as market value adjustments (MVAs) that can be applied if you exit the agreement before the agreed-upon term is over. These penalties can vary depending on the type of vehicle and the specific terms of your agreement. However, it’s important to understand that these charges exist because financial institutions design these products with the expectation that you’ll stick with them for the entire term. So, if you want out early, you might face some financial setbacks.
Strategic Ways to Exit
The good news is that, depending on your situation, you may be able to exit your current fixed-rate vehicle without completely losing out. Some financial products offer an upfront bonus to help offset surrender charges or MVAs. This can effectively make you “whole” and allow you to transition into a better vehicle that aligns with today’s more attractive interest rates. As you approach retirement, these newer, higher-yielding options may better suit your needs.
Refinance Your Retirement Strategy
In the same way that you might refinance your home or debt when interest rates are low, when interest rates are high, it’s time to consider refinancing your retirement. If you locked into a lower interest rate a few years ago, now may be the ideal moment to reassess your options. By making the switch to a more favorable fixed-rate vehicle or other investment, you could be setting yourself up for a better financial future.
Whether you’re in a fixed-rate CD or an annuity, it’s important to weigh your options carefully. By working with a financial advisor, you can understand the costs of exiting early and explore strategies that may allow you to maximize returns on your current and future investments.
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