The novel A Tale of Two Cities by Charles Dickens depicts the plight of the French peasantry demoralized by the French aristocracy followed by their corresponding brutality of the revolutionaries towards the former aristocrats.
Dicken’s famous opening sentence introduces the drama depicted by the French Revolution:
“It was the best of times, it was the worst of times, it was the age of wisdom,
it was the age of foolishness, it was the epoch of belief,
it was the epoch of incredulity, it was the season of Light,
it was the season of Darkness, it was the spring of hope, it was the winter of despair…”
The book accurately depicts how the TIMING of history can radically affect one’s social and financial standing.
When it comes to annuities and retirement…TIMING is EVERYTHING!
“The Best Of Times And The Worst
Of Times” To Buy an Annuity
If you’re like most people retiring today, then the amount of your Social Security benefit alone isn’t going to cut the mustard as far as your income needs go. So you might be considering an annuity.
Sure, you can roll over the money in your 401(k), put it in an annuity, and then turn on the income valve, but when should you do this? When should you NOT do this?
Should you buy an annuity now? Should you wait? Should you stay in the stock market? Should you get out?
Once you retire and stop receiving your paycheck from work, decisions like these become especially vexing. As the saying goes, the devil is in the details. Take a minute to investigate your situation and understand exactly what TYPE of annuity you are getting into before you buy.
The WORST Time to Buy
Most annuities are long-term contracts, so you want to understand the terms of the contract you are getting into before you buy. One of the worst times to buy an annuity is when you know you are going to need the money for a large purchase. It sometimes happens that people get into this investment because they THINK they are earning 6% guaranteed on money in mutual funds, only to find out later that they can’t touch the money. Burn.
Most annuities have surrender fees that charge you a STEEP penalty if you want to access your money. Even if the annuity offers you income, it might not give you access to cash as a lump sum. Furthermore, some annuities cancel your guaranteed benefits if you take out even a small withdrawal. Double burn.
Exceptions to this depend on the TYPE of annuity. For example, Multi Year Guarantee Annuities, or MYGAs, are actually short-term contracts that can last as few as two years. This might be the perfect place to keep your money protected while it grows for a large purchase you know you need to make soon, such as a new car or a home remodel.
Most annuities also offer free withdrawals on up to 10% of your money, and if you purchase an income rider on a fixed indexed annuity, you might still have FULL access to your cash. It all depends on the kind of annuity you get, so ask your financial professional to compare the benefits and features offered so you can shop and compare.
The BEST Time to Buy
The difference between the amount of income provided by your Social Security benefit and the amount of income you KNOW you need to pay the bills is called the income gap. You need to fill this gap in order to cross the bridge into retirement. One of the BEST times to buy an annuity is when you have a known income gap that you need to fill.
Best TYPE of annuity to buy for this situation depends on when you will need the income.
If you need the income right away, you might consider an immediate annuity, because they begin making income payments to you shortly after their purchase. The amount of your principal is protected and your income is guaranteed.
If you need income in 10 years’ time, then a deferred-annuity might be a perfect choice. These annuities allow you to grow or roll-up your money much like a Social Security benefit while keeping it in a secure place where the principal is protected.
The exception to this is the variable annuity. Most variable annuities are deferred annuities designed to give you an income payment at some future date, meanwhile, they invest your principal in the stock market. This means the value of your portfolio could drop and the money you put into the variable annuity is NOT guaranteed.
The WORST Time to Buy
Generally speaking, the worst time to buy an annuity is when you DO NOT need the investment to generate an income. It sometimes happens that people are sold variable annuities with income riders without really knowing what they are buying.
In cases like these, the investor believes they are getting a guaranteed rate of return on funds invested in the stock market. When paying for the privilege of this guarantee along with the mortality and risk fees and the investment fees inside the variable annuity, it becomes a VERY expensive way to invest in the market, especially for someone who doesn’t need the income. Furthermore, because of the income rider, you might have restrictions placed on your investments AND on how you withdraw this money. Triple burn!
Exceptions to this would be deferred annuities that can give you enhanced death benefits. Many non-variable deferred annuities can give you a secure way to build your legacy if you want to grow money for the next generation. This can also be a powerful way to grow money for married couples who want to make sure there is enough set aside should one spouse pass away
Truth is, there is no single best or worst time to buy an annuity – it all depends on your situation and on the type of annuity you plan to purchase. Hopefully, this article gave you a few pointers.
Keep in mind there are ways (that most annuity agents aren’t aware of) to combine properly combine the right annuities to optimize your income and benefits. If you have questions about your individual situation, don’t hesitate to give us a call or fill our secure form right here. No pressure. No Shenanigans. Just the straight answers you deserve.