Should a younger investor consider buying an annuity?
When they align with a person’s risk tolerance and financial goals, annuities can be powerful additions to anyone’s investment portfolio, even those many years away from retirement. If you value moderate, steady growth with guaranteed protection of your principal or are concerned you’ll outlive your savings; an annuity might make sense.
Although there are no federally mandated legal age limits governing annuity sales, most annuity contracts are purchased by people in or near retirement. Even so, these vehicles are starting to find a following among younger investors. Many younger workers have seen their parents or grandparents struggle in retirement. Given the current economic climate, they are understandably concerned that they could also face income shortfalls once they stop getting paychecks.
Why are some younger investors choosing annuity products?
They have concerns about market ups and downs: To say the post-pandemic market has been unpredictable is an understatement.
Younger investors have witnessed the impact of market downturns. Over 60% of millennials surveyed by a financial services company said they were highly concerned about market swings and losses, and over 80% said they’d like to include annuities in their portfolios. Many pre-retirees who understand the core features of annuities appreciate the product’s characteristics of growth potential, tax advantages, and contractually guaranteed streams of lifetime income.
They want to supplement Social Security or other pensions. Millennials worry that Social Security won’t be there for them when they are ready to retire or that benefits may be significantly reduced. Many of these younger, often affluent investors want to create a cornerstone for their retirement plans to generate predictable, reliable income.
For these investors, adding an annuity is a risk-averse way to help cover gaps in their retirement income.
They feel having an “anchor” product such as an annuity will give them confidence.
Some investors under 40 feel that having an annuity will help them invest in riskier assets more confidently. Knowing they will have at least one guaranteed income stream when they retire may allow them to pursue higher returns by investing in riskier assets, such as equities, or alternative investments, such as real estate.
You may not want an annuity if you are under 40.
Despite their many benefits, annuities are not for everyone. For example, an annuity may not be the ideal choice if you are still working and have not maximized your other retirement plans, such as 401ks or IRAs. This is especially true if your company adds matching funds. Some advisors discourage their younger clients from purchasing an annuity or other “safe money” product until they have maxed out their qualified plans.
Many advisors also claim that younger people tend to generate more savings in equity investments such as ETFs and mutual funds than they would with an annuity.
You may also not want to purchase an annuity until later in life because annuities are essentially illiquid. If you’re short on assets and need some or all of the money you put into an annuity, you’ll pay heavy penalties when you withdraw funds.
Some annuities allow penalty-free withdrawals (commonly 10% of your account’s value), but that may not be enough if you have a financial emergency. Also, because your annuity account has grown tax-deferred, you’ll have a tax penalty if you take out money before turning 59 1/2.
For this reason, it’s critical for anyone purchasing an annuity to ensure they have plenty of cash available for emergencies.
Having substantial debt such as student loans, consumer debts, or other loan balances is another reason young people may not want an annuity. Instead, your money might be more efficiently used to pay off your debts and minimize interest charges.
You could benefit by waiting to buy an annuity.
Many money experts say portfolio diversification is more critical than ever in a faltering economy. Even die-hard do-it-yourself investors will benefit by having their investment choices reviewed by an experienced retirement planner. A qualified retirement income specialist will ensure you have the right investment mix to meet your goals. Always look for someone who understands both the accumulation and retirement phases of financial life and is knowledgeable about income products such as permanent life insurance and annuities.
Your advisor might encourage you to wait a while before building the safe money portion of your retirement plan. They may suggest maximizing your employer-sponsored accounts and taking advantage of matching funds, so you’ll have a significant nest egg built up when you stop working. Depending on your situation at that time, you could roll over some of your qualified money into an annuity and create a guaranteed income stream you won’t outlive.
Summing it up: Annuities have many attractive features, including the ability to create an income stream you won’t outlive.
While these features are often more appealing to older, more conservative investors, young people with specific financial needs and goals may also find them helpful. There are, however, potential pitfalls and perils associated with annuities of which you must be aware before including them in your financial planning. It’s always a wise idea to find a reputable retirement income advisor to assist you in choosing the correct products that align with your values, goals, and risk tolerance.