As annuity experts with decades of combined experience in the structured settlement industry, we often get asked – what is the best age to purchase an annuity? The answer truly depends on your unique financial situation, time horizon, risk tolerance, and income needs among many other factors. In this detailed guide, we will analyze the main pros, cons, risks, and considerations for purchasing annuities across all age groups – from young investors to retirees!
Our goal is to provide an honest, unbiased perspective to help investors understand if and when annuities may play a role in a sound financial plan. There is no one-size-fits-all answer, but educating yourself on how different annuity types work, can lead to informed, thoughtful decisions enabling you to protect maximum earnings and get ready for your retirement.
What are Annuities and How Do They Work?
Before diving into the age and life stage analysis, let’s define annuities for those less familiar and explain generally how they work. Annuities are versatile insurance contracts offered by insurance companies that can provide guaranteed retirement income immediately or at some point in the future. You pay a lump-sum premium upfront or multiple payments over time. In return, the insurance company provides regular income payments to you either for a specific time period or guaranteed for the rest of your life – this guaranteed income can start right away or years in the future.
There are four major types of annuities:
- Fixed Annuity: Offers a guaranteed, fixed rate of return on your investment. Your account value grows steadily based on a set interest rate, allowing you to lock in gains over time and eliminate market risk.
- Variable Annuities: Allow you to invest your premium in market sub-accounts similar to mutual funds. The account value fluctuates based on the performance of stocks and bonds within the funds providing unlimited upside potential paired with higher risk.
- Indexed Annuity: Returns are linked to the growth of a market index like the S&P 500. When the index rises, you accrue gains capped at a certain percentage with no market downside risk. Provides a happy medium between fixed and variable offerings.
- Income / Immediate Annuities: Converts your lump sum premium immediately into guaranteed income for life or a set period. There is no account balance, only income annuity payments guaranteed by the insurer. This is the simplest form of annuity offering income security rather than investment features.
Two other major considerations are the duration until lifetime income payments begin and the liquidity terms dictating how accessible your cash will be:
- Deferred vs Immediate: Deferred annuities allow for accumulation growth during the deferral period before converting to income payments. Immediate annuities, like SPIAs (single premium immediate annuity), start lifetime income right after purchase with no deferral period or growth potential.
- Surrender Periods: Most deferred annuities have surrender periods, usually 7-15 years. If withdrawals occur during this period, high surrender charges apply reducing earnings. SPIAs often have no liquidity at all – assets are traded permanently for income.
Now that we have defined annuities more clearly and you understand the basics of how they work, let’s analyze in detail the pros, cons, risks, and key considerations that come into play at different life stages when evaluating an annuity purchase.
Major Factors to Consider When Buying An Annuity At Any Age
While age is one important factor, several core elements should be weighed carefully regardless of your current life stage when determining if you should buy an annuity:
- Time Horizon
Consider both when you may need to access funds in your annuity as well as when you may need income to begin. The length of time you expect to hold the annuity and the duration of the surrender period play a major role. Make sure your time horizon aligns.
For example, if you hope to fully retire and begin drawing lifetime income from an annuity in 10 years at 65, purchasing a deferred annuity with a 7-year surrender period today would likely match up reasonably well with that timeframe. You wouldn’t incur withdrawal penalties accessing funds right when expected income is set to begin.
- Risk Tolerance
Assess your ability to handle market volatility as well as inflation risk. Annuity gains can be fixed, tied to indexes, or invested fully in equities – consider which aligns best with your total tolerance for investment risk as well as how comfortable you are with inflation potentially decreasing your future spending power.
Those desiring full principal protection and little or no market exposure will likely prefer fixed or indexed options. However variable offerings provide higher long run return potential for those willing to bear intermittent volatility. Inflation risk is also lower with variable products offering rising income potential.
- Income Needs
Carefully evaluate both your short and long term cash flow needs in conjunction with all current reliable income sources. Annuities can provide guaranteed lifetime payments, but you give up liquid access to those funds permanently in exchange. Make sure the predictable income provided by an annuity will complement other income streams.
For example, if all your basic living expenses can be covered by Social Security payments, purchasing an income annuity may be unnecessary. However, retirees with greater spending needs than their current fixed income sources allow for could strongly benefit from annuity-based revenue.
- Existing Assets
Take a full inventory of all taxable, non-retirement savings as well as any access you have to defined benefit pensions, IRAs, 401ks and other tax-deferred retirement plans. Ideally secure lifelong income streams should fund essential spending needs in retirement. More flexible assets can then be allocated towards discretionary luxuries and unexpected costs.
Annuities generally make the most sense for retirees lacking sufficient income from pensions, Social Security and minimum IRA required distributions to fully cover fixed basic living expenditures. They are less optimal if you already have abundant assets producing income availability outside of an annuity’s scope.
Annuity For Young Investors (Ages 18-34): Pros And Cons
While not typically top of mind, there are a few niche scenarios where annuities may make sense even early in your investing lifespan if other assets are limited and circumstances warrant their benefits.
- Structured Settlements – If injured at a young age due to medical malpractice, accident liability, or other covered reasons, annuities funded by settlement monies can provide reliable fixed income replacing lost wages or covering significant healthcare costs.
- Lawsuit Damages – Similarly, if granted an annuity as part of a private lawsuit judgment against another party, locked-in income can fund daily expenses or rehabilitation costs.
- Asset Protection – For extraordinarily high net worth individuals like young entrepreneurs or athletes, annuities may shelter a portion of assets from unjust lawsuits or divorce proceedings.
While these benefits seem attractive on the surface, there are significant drawbacks to most annuities for young investors absent extenuating situations.
- Growth Limitations – Investing in annuities at younger ages locks up assets limiting portfolio growth potential over time. Money placed into fixed or income annuities will no longer benefit from decades of future compounded market returns. Even indexed offerings cap upside potential.
- Tax Penalties – Most deferred annuities carry 10% IRS early withdrawal penalties until age 59.5, eliminating flexibility if unexpected expenses arise. This should be strongly considered before committing funds.
- High Expenses – Complex annuity products tend to carry significant annual insurance, management, and carrier expenses reducing net returns. These compounding costs severely cut into your long term investment gains over multiple decades. Annuities should not function as principal retirement investment vehicles early in working careers.
Our Recommendation To Young People!
Due to limited upside from capped returns, ongoing expenses that compound severely over long periods limiting ultimate wealth-building potential, and heavily reduced access to funds without penalty, we rarely recommend annuities for young investors under 35 IF NO extenuating circumstances.
Exceptions may include structured legal settlements, lawsuit damages converted to reliable income streams or asset protection vehicles for profoundly affluent individuals facing elevated litigation risk. Outside of these specific use cases, maximizing contributions to IRAs, 401ks, HSAs, and taxable growth-focused investment accounts will serve most young investors vastly better over the full length of their lifetimes.
If you have received a structured legal settlement including annuity products and need help managing the income payments at a young age, please reach out to us. We can evaluate your specific situation and expected cash flow needs to best map out a financial plan accounting for guaranteed settlement income alongside other investment accounts you may hold.
Annuity For Mid-Career Savers (Ages 35-49): Pros And Cons
Transitioning into peak earning years, mid-career professionals shift focus from pure growth to balancing continued portfolio appreciation with wealth preservation. The first grays of risk management start to enter the picture!
- Tax Deferral – Annuities continue to allow for tax-deferred savings compounding, a benefit maximized over long durations. For slightly older ages, the tax benefit period is reduced but still relevant.
- Event Protection – Principal protection shields savings from unknown market corrections that could severely damage portfolio values close to retirement. This benefit increases nearing the final career stretch.
- Tax Implications – Despite aging closer to 59.5, early withdrawal penalties still apply to deferred annuities. This reduces flexibility to fund large purchases like a home, education expenses, or medical needs.
- Reduced Growth – Annuity fees, caps on returns, and limited investment options hamper long-term appreciation over decades. Higher returns are often available in regular taxable investment accounts absent retirement funding priorities.
- Liquidity Needs – Even with retirement on the horizon, mid-career savers often have major required expenses before retirement like housing, college tuition, or business investments requiring accessible savings.
Our Recommendation To Those Aged 35-49
We typically suggest mid-career professionals in their 40s and 50s maximize tax-advantaged retirement contributions first before considering annuities. With still about a decade or more until retirement, riding out portfolio fluctuations to achieve higher returns is preferred to guaranteeing income this far in advance.
Additionally, unexpected expenses often arise like job loss, major home repairs or growing education needs making liquid savings crucial during peak earning years. Locked-up assets also reduce funding available for business or entrepreneurial investments which could vastly boost overall retirement readiness down the road if successful.
Annuities start to make more sense closer to actual retirement by the late 50s or early 60s when wealth preservation and guaranteed income become more important than return maximization and access to funds. If you have already fully funded target retirement accounts like 401ks and IRAs and have a very low tolerance for market risk and loss, annuities can be considered for a small portion of overall assets. Conservative allocation to shorter-duration fixed annuities with 3-5-year surrender periods can lock in some gains ahead of retirement.
Annuity For Pre-Retirees (Ages 50-64): Pros And Cons
Approaching retirement by your mid-50s to early 60s, protecting your nest egg, planning for reliable fixed expenses and guaranteeing lifetime stable income all move to the forefront of financial priorities. Managing portfolio risk and volatility takes on increased importance compared to return maximization.
- Future Income – Annuity income products can now directly supplement or cover future living costs in conjunction with Social Security, pensions, RMDs, and other withdrawal strategies as retirement nears.
- Lasting Tax Benefits – Even shortened deferral timelines with deferred products allow for continued tax savings compounding right up until income payments commence, no small benefit.
- Principal Protection – Locking in market gains accrued becomes prudent as retirement looms to prevent portfolio losses from derailing the next life stage. Removes sequence of return risk close to the finish line.
- Customization – A wide array of product structuring options exist to craft solutions addressing personal risk factors like longevity or inflation and scheduling reliable income streams where needed.
- Complexity – The diversity of choices between various annuity types, options, benefits, and insurance carriers makes for remarkably overwhelming product comparisons. Sorting through endless pros and cons is challenging.
- Surrender Charges – Most deferred annuities still carry early withdrawal penalties averaging 7-10 years. Liquidity may be needed to purchase retirement homes or fund elder care in the early years. This locks up too much wealth for too long in many situations.
- Underperformance – Between the myriad of fees levied for complex annuity features and the caps limiting return potential during growth phases, net actual portfolio appreciation significantly lags simpler investment approaches over full life cycles.
Our Recommendation To Those Aged 50 to 60
For pre-retirees in their final working years, we take a balanced, personalized approach towards incorporating annuities depending on risk tolerance and overall income needs once labor income ceases. More conservative pre-retirees may still benefit from placing a portion, 10-25%, of investable assets into low-cost, shorter-duration fixed annuities with 3-7 year surrender periods to lock in gains and begin guaranteed income without fully sacrificing liquidity.
This balanced tactic splits the best of both worlds – protected portfolio value and imminent income, while maintaining accessible savings for unexpected costs. Even at this stage, prioritizing maximized contributions to tax-deferred retirement plans over annuities while working leads to favorable long term results. Annuities should play a supporting, secondary role – not the central act.
Annuity For Retirees (Ages 65+): Pros And Cons
As you transition into retirement by age 65, guaranteed lifetime revenue matching spending levels often become the central priority while portfolio growth takes a back seat. Protecting savings duration to age 100 or beyond against market turbulence, inflation, and longevity risk also grows crucial. Annuities can dramatically assist on both fronts if crafted properly.
Income Security Pros
- Principal Protection – Fully shields all accumulated savings and gains from market volatility, eliminating portfolio loss worries in retirement.
- Future Income – Create fully reliable lifetime payment streams covering fixed basic living expenses to maintain quality of life. Survives market corrections and lifespans into extreme old age.
- Spousal Benefits – Joint income options allow for continued payments to surviving spouses, even guaranteed COLA increases boosting over time to combat inflation erosion.
Financial Strategy Pros
- Lower Sequence Risk – Spending flexibility from non-annuity assets increases since basic costs are secured, enabling more optimized portfolio withdrawals even in down markets.
- Reduced Tax Burden – Structured properly around Social Security and RMD income sources, partial annuitization lowers total annual taxes owed via best minimizing income tax brackets entered.
- Effective Legacy Planning – Fund income annuities covering lifetime essential costs for financial independence to age 100+, leaving taxable assets for more intentional legacy gifting providing the most value to beneficiaries. This also enables higher exposure to market growth in non-annuitized assets pursuing legacy maximization.
While these benefits are certainly compelling, retirees must also weigh a few potential drawbacks:
- Loss of Diversification – Placing a sizable portion of assets into annuities over individual securities lowers portfolio diversification and reduces hedging abilities. Mitigate by annuitizing in tranches over longer periods.
- Insurer Risk – Minimal but existent risk of selected insurance carrier defaulting before lifespan ends, unable to pay promised income. Choosing only highly rated insurers lowers probability to near zero.
- Inflation – Income payments are nominal with no inflation protection unless riders selected resulting in underfunded future purchasing power declines. Weigh the tradeoffs carefully vs. COLA options.
Our Recommendation To Retirees
Use Social Security, and pensions/inheritance annuities first for basic costs. Add personal annuities to fill income gaps if needed. Keep growth-oriented assets separate for desired lifestyle pursuits and legacy planning.
The key is balancing tradeoffs based on personal situations. Blindly buying annuities because someone insists it’s right for your age makes little sense. Seek unbiased guidance on crafting optimal blends unique to you.
We encourage all retirees to speak with our team when analyzing how annuities may or may not play a pivotal role within comprehensive income sustainability strategies – we are happy to provide guidance through the complex planning process towards securing your financial independence.
We hope this extensive examination helps demonstrate why overarching annuity recommendations fail to serve investors well at most stages of life without personalized context. Annuities should not be purchased simply because a convincing salesperson insists Now is the ideal age to buy. Take time to thoroughly assess your needs.
While rarely appropriate early on, annuities provide tremendous utility later by securing reliable lifetime income amidst retirement unknowns. Yet blindly converting assets into inflexible income without coordinated planning can severely inhibit hard-earned nest eggs. Seek unbiased guidance instead of believing those who profit from your purchase. Only you can decide what tradeoffs to accept, but with education and wisdom, the optimal blend empowering your financial confidence through retirement becomes clearer over time.