You Need an Annuity—No Matter How Old You Happen to Be
Buying annuities is one way to guarantee that one will have enough money when they retire. And, when you think about it, there aren't that many products that can make...
This story originally appeared on Due
Buying annuities is one way to guarantee that one will have enough money when they retire. And, when you think about it, there aren't that many products that can make such a claim. But, wait a minute? What about Social Security?
While it's true that Social Security can provide a retirement income, it might not be enough to live comfortably.
To be blunt, many people don't have enough money for retirement solely from Social Security. And, since pensions are going the way of the Dodo, you can't bank on this income either.
In addition, it can be difficult to forecast how long your savings will last you. For example, what happens if you live past 100, but only have enough saved until you're 90? That's obviously a problem. No wonder outliving your savings is a top retirement concern. In fact, according to a report from the Congressional Research Service from 2021, 9% of U.S. adults 65 and older live below the poverty line.
With a well-designed annuity, you will always have money throughout your retirement years. Like homes or cars, they're insured for the unexpected. Specifically, they prevent you from outliving your retirement savings.
In short, annuities offer a steady income in retirement. Typically, this is at a growth rate of 1 or 2%. There are other annuities that carry more risk, however, with fund values tied to market performance — along with the gains and losses that come with it.
To be fair, there are costs associated with annuities including surrender charges, mortality and expense risk charges, and administrative fees. Also, it's generally not possible to withdraw the money contributed to an annuity without paying a penalty. In exchange for the guaranteed payouts you'll receive in the future, you will get trading access now.
Why Everyone Needs an Annuity
Even though annuities are associated with retirement, everyone can benefit from them — regardless of your age.
For starters, annuities are customizable. Like adding your favorite toppings to a pizza, annuity riders help you personalize your annuity. For example, a death benefit may provide your beneficiaries, like your spouse or children, with annuity payments until the funds in the annuity run out. But, just like adding toppings to your pie, riders do come at an extra cost.
Another reason to buy an annuity? They offer tax-deferred growth. That means until you withdraw the money, you don't have to pay taxes on any interest you earn. As a result, your investment earnings and interest compound. In other words, this is an effective way to grow your money faster.
But, that's just scratching the surface on why you should consider buying an annuity.
The benefits of annuities have been summarized nicely by the acronym PILL devised by annuity expert Stan Haithcock. And, it stands for;
- Premium Protection. No matter what, there's no risk of losing your money. All fixed annuities guarantee your initial investment. A fixed-indexed annuity offers premium protection in times of low-interest rates and growth potential in times of high-interest rates.
- Income for Life. Most annuities will provide the annuitant with a guaranteed retirement income for the rest of their lives. The annuitant's spouse may also receive income from the annuity, depending on the contract. This is known as a joint and survivor option.
- Legacy. You can name beneficiaries to receive your annuity when you die if you purchase death benefit riders. Your annuity contract will determine how this will exactly work.
- Long-Term Care. Many annuities include riders for long-term care. Long-term care insurance protects you from the costs of long-term care in case you need it. And, considering that long-term care is expected to double from 7 million to 14 million by 2065, this is clutch.
"If you don't need to contractually solve for one or more of the items in the P.I.L.L., then you do not need an annuity. It's that simple," says Stan.
Annuity tax perks.
Do people make tax mistakes when it comes to annuities? Absolutely. Generally speaking, though, annuities offer the following tax advantages;
- Tax perks for long-term care. If you use the interest on an annuity to pay long-term care insurance premiums, it's typically tax-free.
- Taxes at death. If you leave a qualified or non-qualified annuity to your spouse, no taxes will be due.
- Rollovers. You can transfer a lump-sum payout from your IRA, 401(k), 403(b), or pension plan to a qualified annuity without any tax consequences.
- Deductibility. The IRS allows deductions for contributions to qualified annuities. A qualified annuity is subject to the same deductibility limits as an IRA, 401(k), 403(b), or any other qualified plan.
- Exchanges. A 1035 exchange allows you to exchange non-qualified annuities tax-free for another non-qualified annuity. If a contract has poor features, and a better contract or a higher interest rate is available, it can be traded.
- Defer RMDs with a QLAC. The QLAC qualifies as a longevity annuity if it meets IRS requirements. Taxes on your federal income are reduced until you begin taking RMDs, which can be delayed until age 85. Your IRA would eventually have to be withdrawn anyway, but a QLAC income is 100% taxable. QLACs can also be funded by 25% of your IRAs, or $135,000, whichever is lower.
There are no contribution limits.
Contribution limits are one of the biggest criticisms of tax-qualified retirement plans. In other words, you can only deposit a certain amount each year into these accounts. For 2021, the contribution limit on 401(k)s is $19,500 a year ($20,500 in 2022) and $6,000 for IRAs. However, if you're over the age of 50, there are additional catch-up contributions — $6,500 for 401(k)s and $7,000 for IRAs.
In the case of annuities, there is no such limit. This means you can contribute as much as you like each year.
"Installment payments" are available with some annuities.
In the past, an annuity was only able to be purchased using a single lump-sum payment. As a result, if the annuity company required a $10,000 premium, you might have trouble meeting this requirement.
Fortunately, annuity companies are allowing investors, specifically younger customers, you're to fund the contract with multiple payments. Rather than paying ten grand upfront, you could pay one thousand dollars a year for the next ten years. If you started at 34, as an example, you could achieve this by 44. In addition, you would still have decades to continue contributing.
Companies that offer annuities can be trusted.
It's understandable to be skeptical of financial institutions. Personally, I know people who are still recovering from "The Great Recession" of "08 and "09. But, you don't have to lose sleep worrying over annuity companies.
Insurance companies are primarily responsible for selling annuities. Thus, they must possess a state-issued life insurance license. Additionally, you can confirm their financial strength through agencies like AM Best, Moody's Fitch, and Standard & Poor's (S&P). You don't have to worry about the company going under before you receive your annuity payments if it's financially stable.
Different Annuity Types and Age Restrictions
There's no denying that annuities should be on your radar. But, what are the age restrictions with them?
Well, it depends on the insurer at what age you can purchase an annuity. Generally speaking, though, you can buy an annuity at any age. Just note that because annuities are a legal contract, you have to be at least 18 years old. Typically, the upper age limit is 75-95 years old.
It's important to keep in mind that many companies refuse to sell annuities to very young or very old people. Why? These products are often unsuitable for people in these age groups.
Depending on the insurer, the maximum payout age depends on annuitization. This should be spelled out in the annuity contract. Generally speaking, you can wait until 95 before you can annuitize with most companies. Also, as a refresher, if you make an early withdrawal, a surrender charge may be imposed. And, the IRS will find you with a 10% early withdrawal penalty if you take money out of your annuity before 59½.
Lastly, you should consider your payout amounts based on your age. Depending on the date you choose to annuitize, your annuity payments may vary. As a general rule, if you are younger when you annuitize, your payouts will be smaller. If you are waiting for larger payouts, annuitize later.
One more thing. Annuity types can vary in their age limits. So let's take a closer look at the age restrictions associated with different annuities.
An immediate annuity is one that starts paying you back almost immediately after you purchase it since it skips the accumulation phase. Because of this, immediate annuities are purchased with a single premium, aka one lump sum payment.
Most immediate annuity buyers fall into the 70s age bracket. Some companies even sell annuities for people over 100 years old. In most cases, people who are close to retiring or currently in retirement are best served by immediate annuities. The reason? The older someone is when they purchase an immediate annuity, the more money they will receive every month.
As a rule of thumb, immediate annuities aren't necessarily ideal for younger individuals.
Deferred annuities, also known as longevity annuities or deferred income annuities (DIA), guarantee you a future income. As well as being tax-deferred, this also reduces the risk that you will outlive your savings.
Whenever you purchase a deferred annuity, you are committing money today in exchange for a monthly income. That's why deferred annuities are considered a type of "personal pension."
In general, you pay a lump-sum premium for a deferred annuity. However, you may have the option of making several payments. Regardless of how you pay for the premium, you're promised a guaranteed lifetime paycheck from the insurance company.
Check sizes are specified in advance and are based on factors such as your age, gender, and premium. Usually, you'll receive these checks anywhere from two to forty years after you pay your premium.
There is usually a range between 18 and 90 years of age for deferred annuities. Retirees with some time before they require annuity income are great candidates for them. Also, they're a great choice for young people who want to grow their money steadily over time.
Deferred annuities may be a good option for you if you're younger than 50 or looking to grow your nest egg.
Fixed annuities guarantee a minimum interest rate for the duration of the contract. That rate will never be reduced below that fixed minimum amount. As an example, Due offers a 3% guaranteed interest rate on your money. This makes them a very low-risk way to accumulate wealth slowly over time.
A fixed annuity is a great option for those who want a safe method of growing their savings and securing lifetime income. However, the age limit for these products varies from insurer to insurer. But, it's not uncommon for fixed annuities to be available to those between the ages of 18 and 90.
Variable annuities are considered riskier investments. The reason for this? You're investing in sub-accounts — of your choosing. As with mutual funds, these sub-accounts pool money to invest according to specific targets. A sub-account can contain investments like stocks and bonds.
The interest rate in your sub-account will increase if the assets in the portfolio perform well. Conversely, your interest rate will decrease if the assets perform poorly. And, it's even possible that you will lose money.
Variable annuity age limits vary greatly by the insurer. Younger investors who are comfortable with significant market risk may be better suited to these riskier investments since they have more time to make up for these losses.
Fixed indexed annuities.
A fixed indexed annuity combines elements of fixed and variable annuities. Indexed fixed annuities are based on market performance, just like variable annuities. When you buy a fixed index annuity, you choose an index. It's possible that your interest rate will increase or decrease depending on how that index performs.
A fixed index annuity also incorporates a fixed minimum interest rate. Therefore, a poor market performance won't cause you to lose money.
Again, age limits for fixed indexed annuities are set by the insurer. Some insurers let you choose an annuity up until age 85. However, others have a 75-year age limit. For many carriers, you must be over the age of 50 in order to purchase them.
Multi-year guaranteed annuities (MYGAs).
A multi-year guaranteed annuity (MYGA) can be either a deferred or a fixed annuity. They accumulate with a fixed interest rate over the term. And, you fund them over several years by making payment installments.
Most insurance companies will allow you to buy MYGA plans until age 90. But, as you know by now, it varies by insurer. Most people who purchase MYGAs are between their 50s and 70s. However, because of its long accumulation phase, this type of annuity may not be suitable for elderly buyers.
Qualified and non-qualified annuities.
Taxation can also determine can also influence annuities.
As a refresher, all annuities are tax-deferred. Therefore, a person doesn't immediately pay taxes on any gains from the annuity. Rather than paying taxes on your withdrawal, you pay them in the year that you withdraw from the annuity. What's more, the ordinary income tax is payable on all types of annuities, as opposed to capital gains tax.
Depending on their eligibility, annuities can be qualified or nonqualified. Investing in annuities with pre-tax dollars is a qualified annuity. If you receive a distribution from a qualified annuity, you must pay regular income taxes on the full amount. After-tax funds are used to fund non-qualified annuities. However, you do owe taxes on income, even if you didn't pay taxes on the money before.
A difference may exist in the age restrictions on qualifying and non-qualifying annuities. Remember that qualified annuities must adhere to the same rules as traditional 401(k)s and IRAs. And, remember, after the age of 72, you must begin to withdraw your assets.
When Should You Buy an Annuity?
Because they provide lifetime income, annuities can be a solid financial investment for any adult — regardless of their age. In terms of annuitizing or purchasing an annuity, there are no hard and fast rules. Again, each insurance company has its own set of rules.
In general, if you're between the ages of 40 and 80, buying annuities becomes much easier. The reason is that options available to younger and older individuals may be limited.
Although there is no one-size-fits-all solution, here are some reasons why different age groups would buy an annuity;
- Risk-averse buyers in their 30s and 40s prefer safe investments to grow their savings. Besides tax-advantaged retirement accounts and investment brokerage accounts, annuities are another vehicle for growth.
- Many reasons can lead a buyer in their 50s or 60s to buy an annuity. As retirement approaches, many contract holders are seeking safe places to store and grow their retirement savings. Others are drawn to the guaranteed lifetime income.
- Annuities are often purchased by those in their 70s as a source of income. You will occasionally see purchases made for other reasons, just as with age brackets. This age group tends to place a premium on financial security and income certainty.
Also, no matter your age, if you're designing your retirement plan, then you should factor in annuities. More specifically, here are some time and life events where an annuity would make sense.
- Retirement is approaching (or you've already reached) and you have a limited amount in your retirement accounts.
- You need to reduce the required minimum distributions from your retirement accounts.
- You would like to delay receiving Social Security benefits.
- Your 401(k) has been maxed out.
- It worries you that you won't have enough money in retirement.
- You're finishing up the yearly review of your finances.
The post You Need an Annuity—No Matter How Old You Happen to Be appeared first on Due.