Should You Buy An Annuity At Age 50?

Chances are you have heard of annuities at some point. When they have a clear role in your plan, they can be an excellent part of a retirement strategy. If you are in your 50s, you might have thought at some point or another: Does an annuity make sense in your 50s, even when retirement might seem still quite a few years away?

Well, the answer rests on three primary factors: when you plan to retire, what your timeline is from now until then, and what you would use the annuity for.

At this point in your career, you may have put away some money for retirement. Pundits and advisors call this the “preservation stage.” It’s the phase of when you start making money moves to protect the nest egg you have built over time.

This doesn’t mean you should shift entirely away from a growth strategy, which you have likely pursued over your career. Your money still has time to grow, and it should be growing at a modest rate, at the very minimum.

But depending on your situation, there may be other priorities to balance now. For one, sequence risk becomes increasingly probable as your retirement target date approaches.

A substantial loss from market action in the “retirement red zone” (the 10 years before and 10 years after you retire) can have disastrous consequences for you financially for the rest of your life.

Should You Buy an Annuity in Your 50s?

So, does an annuity make sense for you at age 50 (or even in the 50s age group, in general)? Here are six situations where it might make sense, and it’s good to keep in mind that this isn’t an exhaustive list.

Give Annuity Income Benefit Time to Grow

Apart from Social Security, you may need or want more guaranteed income as part of your retirement cash-flow. What is the benefit of guaranteed income?

A guaranteed income stream from an annuity won’t change with market conditions. Your annuity will pay you the same income stream each month, as the insurance company is legally on the hook to maintain this contractual obligation to you.

Income from equities, such as stocks, can go up and down. Not even a pension has the same level of guaranteed protection as an annuity does.

If you will use the annuity for future guaranteed income, then buying an annuity contract in your 50s can give that income benefit even more time to grow. This can be highly beneficial as part of an income maximization strategy for you enjoying a fulfilling, comfortable retirement.

In turn, this would allow your income benefit time to “cook” and grow in value over a 10-year spread. Then on the backend, you could maximize your lifetime income from Social Security and those guaranteed annuity payouts once you retire.

Maximize Social Security Benefits and Other Income

This “wait-and-collect-income” approach can be beneficial for getting more bang for your buck, if you don’t need the money you would put into the annuity anytime soon. In some cases, you might actually be tapping into the insurance company’s money, apart from your own dollars, when you defer income for some years.

For example, say you started a fixed index annuity contract with a $100,000 premium. If you waited 10 years, the guaranteed annual income that you would receive would be $11,000.

Stretching out that $100k over a 10-year span would have otherwise given you $10,000 per year. In other words, some of this income would be paid to you out of the insurance company’s own coffers!

Don’t forget about the benefit of waiting to take Social Security alongside your annuity payouts, as well. Each year that you delay Social Security past your full retirement age lets your benefit accrue even more.

Waiting until age 70 can increase your benefit substantially, leading to higher lifetime payouts.

Changing Risk Tolerance or Want Predictable Growth

Before they had an annuity policy, many annuity owners have found their risk tolerance has changed over time. They then moved money into an annuity so they could protect some of their hard-earned savings.

On the other hand, some people have simply wanted predictable growth for their money. The alternatives with a guaranteed rate – such as bonds or CDs – simply weren’t that appealing with low interest earnings potential. So, they chose a fixed-type annuity for better growth opportunity.

Now, what about you? Maybe you wish not to take as much risk with your money as you move into the later parts of your career. If you want a minimum guaranteed rate, you might consider buying a fixed annuity or a multi-year guarantee annuity.

Both of these annuity options will let your money earn interest at a preset rate. When markets have a bad period and they fall, your money will be protected from those losses. Your annuity will continue to earn interest at that preset rate like clockwork.

Want More Interest Than the Bank is Paying

What if you wanted more than a minimum rate guarantee, but still aren’t keen on the prospect of losing money? Then you might consider a fixed indexed annuity.

This annuity can let you earn interest based on growth tied to an underlying index benchmark, such the S&P 500 Price Index. When the underlying index goes up, your money earns interest based on a portion of that growth.

When the index goes down, your money will earn zero percent for that period. In other words, your principal and the interest money you already earned are locked in.

In exchange for this protection against index losses, however, the insurance company limits the growth potential of your money when the index goes up.

In both cases of fixed or indexed annuities, it’s reasonable to expect growth potential that is above what other fixed-interest instruments have often earned. That includes generally higher growth opportunity than with CDs, money market accounts, bonds, and other similar assets.

Protect Money for Later Goals

Perhaps you want to protect a certain sum of money now so you have it later for your retirement. Or maybe you wish to have it for another goal down the road.

You might wish to leave this money to an heir or save it for a specific expense, such as a cruise vacation or a second home. A fixed type of annuity might be a good solution for parking that money, because of their inherent guarantees as well as certain protections they have under law.

For instance, annuities can be good tools in an estate planning strategy, as they are inherently exempt from probate. They are also usually exempt from attachment by creditors, depending on state laws.

So if you want to earmark some money for a specific heir, naming them as the beneficiary on an annuity can ensure that they get the amount that you want to leave them.

It’s also good to know that your beneficiary may have some taxes on the annuity proceeds they receive. Ask your financial professional, CPA, and attorney for guidance on your personal situation.

Grow Your Money Without Tax Hits

Annuities are also good for growing your money with tax advantage. Why?

Because they are one of the few instruments that inherently grows on a tax-deferred basis. While inside the annuity, your money grows at a compounding rate without taxes being due then.

When you pay taxes is on the backend, once you start taking withdrawals from your annuity. Those withdrawals will be taxed as ordinary income.

From that perspective, one drawback is that there is no capital gains treatment accorded to annuities, regardless of how long you hold them before taking distributions. But if you want to shelter a large sum of money from taxation while it grows, then an annuity might be worthwhile to explore.

Does an Annuity Make Sense in Your 50s for Pre-Retirement?

Annuities can ultimately be used for just about any retirement-related savings or income planning goal. Their versatility in being able to help you meet your goals and solve problems is virtually unlimited.

Consult your financial advisor for more information on annuities and how they can benefit you. Are you looking for a financial professional to walk you through different options or help you with your overall retirement strategy? Then no sweat.

For your convenience, help is just a few clicks away at SafeMoney.com. Many experienced, independent financial professionals are ready to assist you with whatever you might need.

Use our “Find a Financial Professional” section to connect with someone directly. You are welcome to request an initial appointment to discuss your situation and explore a working relationship. Should you need a personal referral, call us at 877.476.9723.