Advantages and Disadvantages – Under Age 60 Years Old

Advantage/ Time

Without a doubt, the more time you have before retirement, the more time you have to take advantage of tax deferral. As you will see later, the difference between a 40 year old and a 45 year old starting an annuity for retirement could mean a $46,000 difference in accumulation.

Advantage/ Flexible Premiums

Understandably, the younger you are, the less apt you are to have already accumulated a lot of money. Therefore, the advantage of a flexible premium is that it can allow one to start saving by making premiums every month or every quarter.

Disadvantages / Taxation

Since tax-deferral has been awarded to annuities as a retirement vehicle, there are tax penalties if an owner withdraws or surrenders prior to age 59.5. To be more exact, there is a 10% tax penalty for pre-tax dollars withdrawn before age 59.5. Therefore, people younger than age 59.5 should not turn to the annuity for partial or total access to their dollars. Hopefully, they will turn to dollars that they have wisely placed in other alternatives.

Advantages/ Social Security

Repositioning some of the money that our clients have in taxable alternatives to a tax-deferred annuity may reduce or eliminate the income taxes that they are paying on their Social Security benefits.

Advantages/ Annuitization

Many retirees are on a fixed income. And, many retirees are living far longer than expected. As a result, outliving your money is a fear that we, as financial professionals, must address. Fortunately, the annuity is the ONLY financial product that can guarantee monthly income for as long as they live (and even their surviving spouse). Simply put, an annuity owner can either purchase an immediate annuity with a single premium or they can apply the values built up in their tax-deferred annuity and annuitize their annuity to receive income that they cannot outlive.

Disadvantages/ Surrender Charges

Generally speaking, a consumer age 60 and older is more apt to need access to earnings than a younger consumer. The 60 year old plus consumer is more apt to be retired and more apt to have special medical needs for themselves or for their spouse. Therefore, liquidity is important – real important to a consumer age 60 and older. While the existence of surrender charges in most annuity contracts make sense, it does NOT make sense for consumers age 60 and older to have all of their money in an annuity if income is desired or anticipated.

Disadvantages/ Death Benefit

Unfortunately, a consumer age 60 and older is more apt to die than a consumer many years younger. Therefore, an annuity that subjects the death benefit to a surrender charge might be something to sidestep unless that annuity provides additional benefits.

The annuity is not for everyone. And, seldom should an annuity be the sole answer for anyone since most people should diversify their dollars. However, annuities have many advantages but just like all financial products, annuities have disadvantages.

It is important for financial professionals to verbalize those advantages and disadvantages to the consumer. Why? This is a profession: the profession of caring, the profession of wanting to give the consumer the best, and the profession of wanting to build a clientele of informed clients.