WHEN SHOULD I BUY AN ANNUITY?
You should start considering an annuity when you are a few years from retirement and want to turn part of your savings into a reliable stream of guaranteed income or you want to protect your money from market loss. Annuities make sense if you’re worried about outliving your money or want protection from stock market downturns. Annuities are especially useful to cover your basic expenses in retirement, like housing, food, and healthcare. If you know your basic needs are met, the market downturns are less worrisome. Annuities are safe investments, so if you are still more than 10 years from retirement, an annuity isn’t for you. We have software to make sure you get the best interest rate or the highest income payout, guaranteed.
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If purchased correctly, annuities are a low-risk investment. You shouldn’t even consider buying an annuity until you are 50 years old or within 10 years from retiring. Annuities are tax deferred investments, and the interest earned is tax deferred until you withdraw. Because the IRS gives annuities this special tax status, if you withdraw funds from a deferred annuity before you are 59 ½ the IRS will charge you a 10% early withdrawal penalty.
If you retire before the age of 59 ½ we can help you purchase an immediate annuity without tax penalties, because payments start right away. The taxes are not deferred so the IRS will not charge the 10% early withdrawal penalty for a SPIA as long as income starts the same year you purchase the annuity.
The difference is immediate annuities versus deferred annuities. Even if you set up regular withdrawal payments from a deferred annuity before 59 ½, the IRS will still penalize you because you are not required to take the withdrawal. In a deferred annuity, you have the option of delaying payments and receiving a tax deferral benefit. Only an immediate annuity can be used for payments before the age 59 ½. You can purchase a deferred annuity before the age of 59 ½ but you should plan to leave it alone until you are at least 59 ½ to avoide IRS penalties.
You SHOULD NOT purchase an annuity if you are:
- Under 40 years of age
- Need your funds to be fully liquid
- Looking for aggressive growth
You SHOULD consider an annuity if you are:
- Looking for a steady lifetime income
- Moving from the growth phase to protection and income
- Have the ability to leave a lump sum in the annuity for a set period of time
As a general rule, annuities should not make up more than 50% of your total investable assets. If someone is pressuring you to buy an annuity, remember they have a financial interest in you saying yes, so don’t buy unless you are certain it is right for you. Alternatively, if your financial planner is telling you not to buy an annuity when it seems right to you, remember they earn money by keeping your assets under management.