The Tax Code allows annuities to grow tax-deferred, in other words, any interest credited to your annuity account will not carry an accessed tax. Annuities are designed as long term vehicles to be used later in life — at least until age 59 ½. To make annuity owners focus on their use later in life, the IRS imposes a 10% additional tax for any annuity accessed before that age minimum of 59 ½. The tax is in addition to any income taxes which may also be due on a pre-59 ½ distributions.
With the pre-591/2 tax issue under consideration, when is a good age to consider investing in an annuity? Like all decisions it depends, it depends on your situations. Many people begin investing in an annuity for use later in life as early as 25 or 30. They do so with the understanding and knowledge that the use of the annuity will be for later in life. Annuities purchased at this early age are quite rare and generally an annuity at that age period is not the best or wisest choice.
Annuities should be considered later in life, generally from age 50 or later. At age 50 most people have their retirement plan organized, and decisions regarding asset allocations usually have been answered. The use of an annuity later in life is for stability, safety, security and for income — guaranteed income.
Retirement planning consists of two essential elements: income and inflation. Income needed to provide the essentials and enjoyment if life once the working time period is over, inflation to help offset any loss of purchasing power in the future. Most advisors would build a retirement plan layering in guaranteed income on top of social security and a defined benefit company sponsored pension.
On top of that would be funds which may carry some investment risk such as mutual funds but would also help provide some protection against inflation in the future.
Consider the use of this colored pyramid to explain how the layering effect can help you plan your retirement financial future.
Top layer: Market exposure for inflation protection
Middle layer: Fixed indexed annuities with an income rider
Lower layer: Company pension plan
Lowest layer: Social Security
Indexed Annuities: What Are They Should You Invest In One?
Placing a layered guaranteed income plan in place allows you to assume more risk during the accumulation period. What age is a good time to consider investing in an annuity? The best time is when you have a solid plan in place and layering in the guarantees of an annuity help provide the desired benefits.
Make a list of your retirement assets, are you enrolled on your company pension plan? Ask your human resources department to give you a potential estimate of what your retirement income may be. If your company offers a 401 (k) ask about matching funds, consider adding as mush to your 401 (k) as possible. Once your contributions are finalized, then considering an annuity as supplemental income could make sense.
Review your plan annually and make sure you pension and 401 (k) asset allocations continue to match your desired goals.
Remember, annuities are not for everyone, but when safety, security and stability become a factor in your planning, they can be marvelous investments to own.
