When Should One Start an Annuity?

Shawn Plummer

CEO, The Annuity Expert

We all want a secure financial future. Whether you’re a recent college graduate or someone approaching retirement, you’ve probably heard about annuities. But the real question is: When should one start an annuity? Let’s break it down in a way that emphasizes not just the technical aspects but also the human side of this decision. Investing isn’t just about numbers; it’s about ensuring our future selves and families are well cared for.

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Understanding Your Investment Strategy: Balance is Key

Aggressive, Moderate, and Conservative: Why All Three Matter

Every individual has a unique risk tolerance. Some thrive on high-risk, high-reward investments, while others prioritize stability. Typically, a balanced portfolio includes a combination of aggressive, moderate, and conservative investments.

Example: Imagine you’re baking a cake. If you use only sugar, it’ll be too sweet. If you add only flour, it’ll be too bland. But mix them in the right proportion, and you get a delicious treat. Similarly, the right mix of investment types ensures a balanced, fruitful portfolio.

The Role of Fixed Indexed Annuities (FIAs) in Your Portfolio

FIAs as a “Bond Alternative”

Fixed-indexed annuities (FIAs) are often viewed as a bond alternative. They offer a safer growth opportunity than stocks while potentially delivering higher returns than traditional bonds.

Example: Consider FIAs as a safety net in a circus performance. While the tightrope walker (stock investor) takes on more risk, the performer with the net (FIA investor) has a safety mechanism, ensuring that falls aren’t devastating.

Starting Early with FIAs: Safe Growth in Your Twenties and Thirties

Why the Earlier, the Better?

When you’re in your twenties and thirties, you’re often in a better position to capitalize on the long-term growth potential of FIAs. Starting FIAs for safe growth early lets you leverage the power of compound interest, enhancing your returns over time.

Example: Imagine planting a tree. If you plant it while you’re young and nurture it, by the time you’re nearing retirement, it’ll be a large, sturdy tree with deep roots, providing shade and fruit.

Annuities with Lifetime Income Riders: A Strategy for the Forties and Beyond

Building a Guaranteed Income Stream for Retirement

If you’re in your forties or later, it might be time to consider annuities with lifetime income riders. These annuities ensure a steady income stream when you retire, irrespective of market conditions.

Tip: The key to optimizing your retirement income is the time between the annuity purchase and the date you start collecting lifetime income. The longer you let your money grow at the insurance company, the higher the income payment when you retire.

Example: Think of this as building a dam on a river. Even in seasons where the river’s flow decreases, the dam ensures you have a steady water reservoir (income) for your needs.

Protecting Your Investments as You Near Retirement

Risk Management: A Vital Consideration

Our rule of thumb, especially after someone has retired, is simple: “If you can’t afford to lose money, you shouldn’t expose yourself to the risk of losing money.” As you inch closer to retirement, your focus should shift from high growth to capital preservation.

Example: Consider a candle that’s burned down almost to its base. While it once illuminated a room brightly, shielding it from drafts and winds is essential to make the most of its remaining light.

Next Steps

Investing in annuities, like any financial decision, should be made considering your circumstances, age, and risk tolerance. By understanding when and why to start an annuity, you’re taking a proactive step toward a comfortable and secure financial future. Always prioritize your well-being and consult with professionals to ensure your investment strategy aligns with your goals. Your future self will thank you.

When Should One Start An Annuity

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Frequently Asked Questions

Who should not buy an annuity?

Individuals with short life expectancy, those who need liquidity, or who already have sufficient guaranteed income sources for retirement may not benefit from an annuity. High fees and potential tax implications could make annuities unsuitable for certain investors.

Do you pay taxes on annuities?

Yes, taxes on annuities depend on the type and how they were funded. Earnings from a deferred annuity are taxed as ordinary income upon withdrawal. Immediate annuities may have a portion tax-free as a return of principal, but earnings are taxable.

What is the 5-year rule for annuities?

The 5-year annuity rule typically refers to the period that must pass before withdrawing earnings without incurring a 10% early withdrawal penalty for those under 59½ years old. It also applies to certain inherited annuities for tax-deferred earnings distribution.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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