Introduction
Whether you are fresh out of college and starting your first job or counting down the days to retirement, annuities have something to offer every investor. One of the best things about annuities is their flexibility and variability. The interests and goals of an investor will change as their time horizon shortens. There are several annuity types and options that can be chosen as an investor’s career progresses. Aligning an annuity type with an investor’s age and goals will maximize the value of the return as well as ensure as comfortable a retirement as possible.
Annuities for Younger Investors
One of the most valuable assets younger workers have -- is time. Thanks to the power of compounding interest, I would advise that individuals under 50, in most cases, invest their money in vehicles with greater market exposure. With a longer time horizon, younger investors can afford to take on more risk.
Notice that I mentioned the majority of young investors should avoid annuities. However, if you've inherited substantial wealth or are a high-net-worth entrepreneur, an annuity might be worth considering even at a younger age. In some states, annuities are protected from frivolous lawsuits, which could make them a useful tool for estate planning in such unique situations.
But if a young worker insists, due to their risk tolerance or other reasons, on including an annuity as part of their retirement portfolio there are some annuities that make more sense than others.
A deferred annuity means that the money invested grows tax deferred. This simply means that you do not have to pay any taxes until the money is paid out.
A flexible premium annuity means you invest in the annuity over time. This contrasts with a single premium annuity which is funded with a single lump sum payment. The flexible premium annuity likely allows lower earning younger workers the opportunity to invest in an annuity over time in lieu of a lump sum which they may not have access to.
For more growth potential there are also variable and indexed annuities offering some market exposure.
Other considerations for young investors: Balancing growth and fees, liquidity needs, flexibility in withdrawals
Annuities for Older Investors and Retirees
As investors approach the age of 50, annuities often become a more suitable investment option. This shift is primarily due to a shorter time horizon and a corresponding decrease in risk tolerance as retirement draws nearer.
For older investors, the primary focus typically shifts to securing guaranteed income. With traditional pensions becoming increasingly rare and uncertainty surrounding the future of Social Security, having an additional source of guaranteed income can provide much-needed stability in a retirement plan.
Along with lower risk, annuities can provide guaranteed payouts immediately (immediate annuities) or at a specified time in the future (deferred annuities).
Other considerations for older investors: Inflation risk, estate planning, access to funds for emergencies
How to Choose the Right Annuity for Age and Goals
It’s been mentioned before, but an investor’s time horizon is really the primary factor in determining the preparedness for someone to consider an annuity. The longer the time horizon, the higher the risk tolerance tends to be. As described above, there are annuity options for any age investor. Not to mention a myriad of insurance companies offering various types of annuities, with each branded annuity offering its own nuances and details. It’s recommended that at any age you seek out a trusted financial planner who can help align your financial goals, risk tolerance and time horizon with the right annuity product (or no annuity, if called for).