When is the Right Time to Buy an Annuity?
This is a question I get asked a lot in my practice. However, this question is asked for many different reasons. There are several issues this question refers to, and each of them should be answered specifically in accordance with their real, underlying question.
At what age should I purchase an annuity?
This is a broad question, and will be answered in more detail as we work through some of the others. Generally speaking, most people under the age of 40 should not purchase an annuity. And in many other cases, people under the age of 55 may benefit very little from purchasing an annuity. The reason for this is the way deferred annuities are taxed. They work very much like an IRA in that any withdrawals before age 59 ½ can trigger a 10% tax penalty, with a few exceptions. There are typically better accumulation vehicles for younger clients. In addition, clients older than 85 can experience difficulties when purchasing an annuity. Many of the enhanced liquidity features are not available above age 75 and medical/long-term care costs are a real concern.
At what point in the market cycle should I buy an annuity?
This question refers directly to fixed indexed annuities. Whether you think the market will go up or down is irrelevant. The stock market, by nature, cannot be consistently predicted. One of the main benefits of a fixed indexed annuity is that it exploits the cyclical nature of the stock market. If you were to purchase an annuity at all-time stock market highs, your principal is protected from the loss caused by stock market crashes. Conversely, if you were to buy an annuity when the market is low, you will still gain when the market goes up. Assuming other concerns such as liquidity and income needs are met, timing the market is not advisable when purchasing an annuity.
What needs do I have that an annuity can help me meet after I retire?
When you retire, there are several things that change about your finances that you should be concerned about. Once you stop earning income, replacing any money lost to stock market downturns is extremely difficult. With less earned income, there simply is no money to replace it without going back to work. An annuity can eliminate risk to your principal while still giving you great potential for return when the stock market goes up. The second need an annuity can help you with is providing a guaranteed income stream in retirement. An annuity is the only financial tool that can do this. If you need guaranteed income above and beyond your Social Security and pension income, an annuity may be right for you.
When should I buy an annuity to maximize my potential income?
Each client has unique needs based on their individual circumstances. However, the more time you have to defer before you start to take income, the greater your potential income will be. There are add-ons to fixed indexed annuities called “income riders” that will guarantee you a certain rate of return for income later in life. Some of these can even be upwards of 7% per year. Compare this with rates on other deposits, such as CDs at 0.7% per year if you’re lucky, this can be an attractive option. A better question might be how long you want your money to grow at 7% for your future income needs.
At what point in my lifecycle should I purchase a fixed annuity to protect my principal?
This is more personal preference than it is a right or wrong answer. Risk is something that many people simply do not want to tolerate any longer than necessary. For many people, peace of mind is worth more than the adrenaline rush feeling you may get from being invested in the stock market. However, if you don’t have a lot of extra money in retirement, it may be a good idea to set aside a portion of your assets into an annuity to reduce the risk of running out of money in retirement. Ask yourself, “Can I really afford to lose 20% of my money? 30%? 40%?” If the thought of losing that much money makes you shudder, maybe now is better than later.
When is the right time to buy an annuity? Maybe now, maybe later, maybe never. An annuity is not always appropriate for everyone. But annuities can be very useful tools to the majority of retirees who need some safety and additional income in their portfolios
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