Preparing for the future is a crucial step to ensure peace of mind for your retirement. Social security is not enough for many retirees to maintain a suitable quality of life, and even additional investment benefits may not be enough to manage the bills and other necessities, making one’s golden age a time of stress and anxiety rather than the well-deserved, peaceful rest they expected.
As a result, many proactive people look for additional options early to know that, when the time comes, they will be financially secure for the rest of their lives and able to live comfortably during that time. One avenue many consider is fixed index annuities, but determining what age is best to begin this type of investment is a matter of constant debate.
When should you look into annuities to supplement your retirement income?
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What Is an Annuity?
Various financial institutions, such as insurance agencies or banks, offer annuities. Their purpose is to establish set, predictable payments in the future, either over a set period of years or until the end of life. You will decide whether you want a set-term payout period, such as ten years, or if you wish those payments to continue for the rest of your life. Your investor will use an established annuity calculation formula so that you can see the return you can expect for each payment.
Once you agree with the institution of your choice, you will enter an accumulation phase. At this time, you will either submit a large lump sum or arrange monthly payments of an agreed-upon amount throughout this phase, which generally continues until you are ready to draw payments.
If you want those payments to begin within the year, this is known as an “immediate annuity,” as opposed to any contract beyond that time, called a “deferred annuity.” Of course, the more money you deposit into your annuity contract, the greater the amount of each payout you receive. Fortunately, as an investment, this money enjoys tax-deferred growth over time, so you receive more back than you put in.
The payout period is known as the “distribution period.” Once this contract segment starts, you stop paying into the annuity and begin receiving your monthly checks; the annuity provider guarantees these disbursements for the contract term. If you have arranged for life-long payments, some arrangements allow a named beneficiary to receive any remaining funds owed to you per the agreement.
Why Might You Need an Annuity?
There are many reasons why you should organize an annuity. Here are some of the most significant benefits of making this type of investment:
- You can have a guaranteed source of income for life.
- The disbursements can supplement your retirement as a tax-deferred income.
- It offers greater protection than the stock market and can serve as a form of protection for your investments.
- You have peace of mind knowing you will not outlive your retirement funds.
- An annuity allows you to customize your finances as you can plan disbursement amounts
- There are versatile contract options to choose from based on your needs
What Age Is Best for Starting an Annuity?
With the understanding that the more funds you invest, the more you will receive per month, determining when to begin those payments is an essential question. After all, many people want maximum benefits when entering an investment contract.
Annuity experts suggest that the best time to begin the distribution period is around the age of 70, so this advice at least offers a proposed end period for your part of the investment. However, you should pick the appropriate period for monthly payouts based on your current and projected needs. Whatever age you feel is best, having an end goal in mind will help you organize your annuity to ensure your disbursement amounts are what you want them to be.
When you begin the accumulation period, the younger you are, the more time your investment has to accrue tax-deferred growth. Waiting until you have maxed out any IRA or 401(k) benefits can help you establish a good starting point. You have nothing further to gain in that department and can shift your attention to the annuity as that additional supplemental income.
Ultimately, deciding to look into annuities largely depends upon your end goal. If you are cautious about the future and are looking for a safe place for your investment to grow, you can begin a deferred annuity as early as your 30s and 40s; however, you may face additional fees.
Furthermore, it might be better to wait until at least your 50s because before then, you could always find safer options in the stock market and have plenty of time left to ride out any volatility. This is advantageous if you need to make an emergency withdrawal because annuities will charge 10% of your funds for early disbursement.
For immediate annuities, most purchasers are in their mid 70’s because they have decided to drop a lump sum payment in exchange for the pre-established monthly disbursements. They can maximize their payouts at a higher age range because it is easier to actualize the time remaining on life-long contracts. The downside is that there is less time to reap the additional monetary benefits of long-term investment.
The Bottom Line
The best time to look into annuities is right now. Even if you do not purchase one, it is helpful to understand how they work and how you can use them to achieve your goals. The best age to invest in an annuity depends mainly on your needs and retirement plans.
If you seek to build long-term growth to secure life-long payments after retirement, you should begin investing in your 50s or 60s. If you want maximum monthly payouts for an immediate annuity, you should start in your 70s.
Remember that you want to avoid any situation where you would need to withdraw money from your annuity earlier, as there is a 10% penalty for doing so. This incidence is far more likely the younger you are, as more unpredictable situations can arise than once you reach retirement age.
