Not much in life comes with a guarantee - annuities are an exception. These insurance contracts can guarantee a fixed income stream in retirement. When it comes to purchasing an annuity, your current age and relation to retirement can make a big difference. However, the best age for purchasing an annuity depends on your individual situation and goals. What works well for a person with a higher risk tolerance may not prove suitable for someone only seeking conservative investments, and vice versa.
Yes, annuities are complicated. As with any investment, it is vital you understand how they work, as well as any potential pros and cons. Therefore, we thought we'd take this opportunity today to provide you with additional information you may find useful.
Annuities are available as either fixed, indexed, or variable. In addition, they may be set up for immediate or deferred payments. Immediate annuities start payments right away, while deferred annuities promise to pay the investor a lump sum or monthly payments at an agreed-upon future date.
Fixed-income annuities provide the classic guaranteed monthly payment and tend to be a more attractive choice for those aged 60 and up.
Premiums paid to variable annuities are invested in the stock and bond markets, along with money markets - meaning they present more risk. If you do not plan to retire for several years, choosing a variable annuity could present an opportunity for more growth. Remember, however, that these gains would not come with a guarantee. There is also the potential that losses could affect the principal amount.
Indexed annuities pay an interest rate based on the performance of a particular index. The S&P 500 is among the most common. An indexed annuity allows the purchaser to earn higher yields when the market does well (goes up). In bearish years (when the market goes down), the insurance contract provides a small, guaranteed interest rate. Indexed annuities are typically recommended for those planning to retire in the next 10 to 15 years.
Considering Your Retirement Income Needs
Before considering an annuity, calculate your income needs in retirement - which we also like to refer to as a "work-optional lifestyle". Besides Social Security, take into account the value of any pensions, 401(k)s (or similar employer-sponsored retirement plans), and IRAs. Do you intend to retire completely or work part-time? Do your retirement plans include a lot of travel or costly hobbies? Do you intend to downsize, move to a less expensive area, or maintain your current home? These are all crucial considerations to make when determining your income needs for a work-optional lifestyle.
Maximizing the Monthly Payment
The longer you wait to invest in an income annuity, the higher your monthly income stream. If you retire at 65 and purchase an annuity, you start receiving that immediate income stream, but it is not nearly as much as if you waited a decade. For example, the monthly payout for someone who purchases an annuity at 75 would be greater than the amount someone aged 65 receives for the same product.
Keep in mind that monthly payments are fixed amounts. They do not rise over time, but they also do not go down. What does change over time is how much of that monthly income is eaten away by inflation. That’s why maximizing that income stream is so critical. It can make a tremendous difference in your standard of living in retirement.
How Long Will You Need It?
We don't know how long we are going to live. Healthier people have a tendency to live longer than those with chronic conditions. Also, these days, people are living longer overall. That means you must plan for income over a potentially long lifespan. If you have reason to expect an exceptionally long life, your annuity decisions should reflect that.
When to Buy an Annuity
The average age of an annuity holder is 70 years old.1 Waiting longer means receiving higher monthly payouts for those purchasing an immediate annuity.
Those seeking to buy a deferred annuity tend to be much younger, generally between the ages of 45 and 55. These younger buyers can take more risks with investments since they have a longer timeline to retirement. If losses occur, they have time to allow their money to (hopefully) recover. That is not the case with the older investor, who tends to be better off relying on more conservative investment strategies.
Our team is happy to explain the intricacies of annuities and which of these contracts best suits your needs. In addition, we can advise you on the right time to buy an annuity after we review your financial situation and current plan for retirement. Annuities are not for everyone, but for some retirees, they can be great vehicles to ensure sufficient income to enjoy the the work-optional lifestyle you had been hoping for.
Let us know how we can help!
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