When’s the best time to buy an annuity?
Is there an optimal age in which to purchase an annuity? The answer depends on a number of factors, including:
- A person’s short-term and long-term financial goals
- Whether an individual has other liquid assets
- Income needs today and what they might be down the road
- The interest rate environment today and the direction it might move in the future
- The person’s estimated lifespan
- The type of annuity purchased
According to a 2013 Gallup survey of annuity owners, the trend in the last several years is shifting toward younger buyers. The average age of a first annuity purchase is 51. About 39 percent of those surveyed made their first annuity purchase before age 50, while only 14 percent did at age 65 or older. The largest share, 47 percent, purchased their first annuity between the ages of 50 and 64. About 93 percent of those participating in the survey still owned the first annuity they bought.
The value of deferred annuities in your 50s
Pre-retirees in their mid 50s are the target demographic for deferred annuities, which are products the owner holds onto for several years before cashing them out or withdrawing income. The reason deferred annuities are attractive to this group are:
If they feel the need to make up for lost time and accumulate a larger sum of retirement income, an annuity does not have contribution limits like 401(k)s or IRAs. You can contribute $100,000 or more.
The annuity’s account value grows tax-deferred and owners only pay taxes when they withdraw income.
The closer people get to retirement, the more their retirement plans can be adversely affected by stock market losses. Most annuities offer guaranteed interest rates without risk of losing principal due to movements in the market.
A deferred annuity purchased 10 years before retirement will likely yield a higher income amount than an immediate annuity purchased just before retirement. The difference will depend on a number of factors, such as the company providing the annuity.
One calculator showed that a 55-year-old male who deposited $100,000 in a deferred annuity for 10 years would be able to receive $677 in monthly lifetime income. A 65-year-old male who deposited $100,000 in an immediate annuity would receive only $452 in lifetime income.
You can also see the comparison based on the amount of monthly income you desire. Using the same calculator, an individual who wanted $1,200 in monthly income starting at age 65 would have to deposit $177,000 in a deferred annuity at age 55. Waiting until age 65 to buy an immediate annuity would mean making a premium payment of more than $265,000 to receive $1,200 in monthly income.
Should I buy an annuity when I’m young?
While it makes sense to buy deferred annuities before retirement, they are typically not recommended for young individuals. People still in the early part of their careers will almost always benefit more from the pre-tax contributions and tax-deferred growth of 401(k)s and IRAs.
However, if you have maximized your contributions to those vehicles and still have resources you want to put aside for retirement, then you could invest some in a deferred annuity. Variable annuities in which you’re invested in the market will provide the greater potential for growth but also come with the risk of losing principal to market losses. Indexed annuities, on the other hand, will provide some growth potential but with a guarantee that you will not lose principal due to market losses.
What if I’m already retired?
The older you are, the less time you will want to defer income and the more you will want to consider an immediate annuity. Therefore, it’s important to understand the surrender charge period of a deferred annuity, which is the minimum amount of time you must hold onto the annuity before cashing out or withdrawing income. Doing so before the end of the surrender charge period will result in a penalty.
For example, if you bought a 10-year annuity at age 65, you will not be able to receive income until age 75 without penalty. On the other hand, if you purchased an annuity with a five-year surrender period, you can take income beginning at age 70 without penalty. Annuities have limited liquidity, so those purchasing these products should have other sources of funds in case of sudden cash needs.
While it’s best to purchase deferred annuities at younger, pre-retirement ages, retirees are better served to wait as long as possible to purchase an immediate annuity. That’s because monthly income payments are based largely on a person’s age; the older one is when receiving income, the higher those income payments will be.