Five reasons why younger investors should consider annuities
While annuities are primarily bought by retirees and those approaching retirement, they are starting to find a market with younger investors. People in their 40s and even some millennials are finding value in annuities.
Here are five reasons why an annuity may be of value to younger investors:
You don’t want to subject your retirement savings to market fluctuations.
The conventional wisdom is that younger investors can withstand market losses because they have more time before retirement to recoup those losses. The higher potential returns that come with taking on more investment risk also makes investing in the stock market, especially as part of a tax-qualified retirement plan, more advantageous for young people than investing in a guaranteed, fixed-interest product like some annuities.
However, many young people who have gone through both the tech stock bubble of the early 2000s and the 2008 financial crisis want more stability. After all, losing 25 percent of your portfolio’s value in one year means it will have to increase 33 percent just to get back to its original starting point. That could take years to happen.
Fixed and indexed annuities both offer guaranteed interest rates without risking principal to market losses.
You have money you want to invest beyond the IRS limit for qualified retirement plans.
Tax-qualified retirement plans have a cap on what can be contributed annually. The cap on 401(k)s is currently $18,000 a year, and $5,500 for IRAs. Annuities have no such cap.
Some annuities allow “installment payments.”
Traditionally, annuities required a single lump sum payment to fund. But as a way to encourage younger investors to consider annuities, many insurers have introduced annuities that allow you to fund the contract with multiple payments over an extended period. This makes an annuity more like a savings account, one that will eventually pay back the owner with a lump sum or a guaranteed income stream.
You would rather pay tax on the “seed” instead of the “crop.”
Many financial experts claim that tax-qualified retirement plans will cause some investors to pay more in tax later than any tax savings they enjoyed by making tax-free contributions and having their investment grow tax-deferred.
A common analogy used to explain this is to compare the cost of planting seed to the income produced by the harvested crop. The value of the seed used in planting a field is much lower than the value of the crop harvested. With 401(k)s and IRAs, the argument goes, an investor may get a tax break for the seed planted, but they end up paying the full tax on the total crop. On the other hand, annuity investors don’t get tax savings on their contributions (the seed), but they also don’t have to pay as much tax on their income (the crop). That because only the gain between principal and income is taxed, and only when income is taken from the annuity.
The other part of the argument is that early on in your professional life, your income will put you in a lower tax bracket than what you will be later in life, so your tax savings will be minimal now compared to what they could be later.
You want to take advantage of an annuity’s optional features.
Insurance companies offer several optional benefits to annuity products to make them more flexible that can be of value to younger investors.
If your annuity is still in the accumulation phase, a long-term care, or confinement, rider will allow you to access some or all of the annuity’s account value without incurring a surrender penalty if you are confined to a nursing home or other care facility. If you are drawing income from the annuity, this rider will increase your income payments, up to double. Similar riders are also available if you become disabled or are diagnosed with a terminal illness.
A common feature on annuities is a death benefit that is passed on to your beneficiaries at your death. The amount your heirs receive will depend on the type of annuity you own and which death benefit option you select.