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Retired Military Finances 201: When's the Right Time to Buy an Annuity?

Retirement Funding

As a military retiree, you have a lot of "annuitized" income. Commercial annuities might not be necessary while you are alive. That might not be the case for your surviving spouse. An annuity can solve that problem. These insurance contracts will guarantee you and/or your surviving spouse a fixed income stream in retirement. When it comes to purchasing an annuity, your current age and relation to retirement can make a big difference. However, the best age for purchasing an annuity depends on your individual situation and goals. What works well for a person with a higher risk tolerance may not prove suitable for someone only seeking conservative investments and vice versa.

Understanding Annuities

Annuities are complicated. As with any investment, it is vital to understand how they work, as well as any potential pros and cons.

Annuities are available as either fixed, indexed or variable and as immediate or deferred. Immediate annuities start payments right away, while deferred annuities promise to pay the investor a lump sum or monthly payments at an agreed-upon future date.

Fixed-Income Annuities

Fixed-income annuities provide the classic guaranteed monthly payment and tend to be a more attractive choice for those aged 60 and up.

Variable Annuities

Premiums paid to variable annuities are invested in the stock and bond markets, with money market options - meaning they present more risk. If you do not plan to retire for several years, choosing a variable annuity could present the opportunity for more growth. Remember, however, that these gains would not come with a guarantee. There is also the potential that losses could affect the principal amount.

Indexed Annuities

Indexed annuities pays an interest rate based on the performance of a particular index. The S&P 500 is among the most common. An indexed annuity allows the purchaser to earn higher yields when the market does well. In bearish years, the insurance contract provides a small, guaranteed interest rate. Indexed annuities are typically recommended for those planning to retire in the next 10 to 15 years. 

Considering Your Retirement Income Needs

Before considering an annuity, calculate your income needs in retirement. Besides Social Security, take into account the value of your military pension and SBP benefit, TSP and 401(k)s  and IRAs. Do you intend to retire completely or work part-time? Do your retirement plans include a lot of travel or costly hobbies? Do you intend to downsize, move to a less expensive area or maintain your current home? These are all crucial considerations to make when determining your retirement income needs. 

Maximizing the Monthly Payment

The longer you wait to invest in an income annuity, the higher your monthly income stream. If you retire at 65 and purchase an annuity, you start receiving that immediate income stream, but it is not nearly as much as if you waited a decade. For example, the monthly payout for someone who purchases an annuity at 75 would be greater than the amount someone aged 65 receives for the same product.

Keep in mind that monthly payments generally are fixed amounts. They do not rise over time unless you purchase an inflation reider, but they also do not go down. What does change over time is how much of that monthly income is eaten away by inflation. That’s why maximizing that income stream is so critical. It can make a tremendous difference in your standard of living in retirement.

How Long Will You Spend in Retirement?

The mystery of life is that any one of us could be here today and gone tomorrow. Still, healthier people tend to live longer than those with chronic conditions. These days, people are living longer overall, and it is wise to consider the possibility that you could reach the century mark. That means you must plan for income over a potentially long lifespan. If you have reason to expect an exceptionally long life, your annuity decisions should reflect that. 

If you enjoy good health and your relatives tend to live to ripe old ages, it may be beneficial to wait as long as possible before buying an annuity. Of course, that is assuming you have sufficient retirement income to maintain your lifestyle.

When to Buy an Annuity

The average age of an annuity holder is 70 years old.1 Waiting longer means receiving higher monthly payouts for those purchasing an immediate annuity.

Those seeking to buy a deferred annuity tend to be much younger, generally between the ages of 45 and 55. These younger buyers can take more risks with investments since they have a longer timeline to retirement. If losses occur, they have time to allow their money to (hopefully) recover. That is not the case with the older investor, who tends to be better off relying on more conservative investment strategies.   

Your financial advisor or insurance agent can explain the intricacies of annuities and which of these contracts best suits your needs. These professionals will advise the right time to buy an annuity after reviewing your financial situation and current plan for retirement. Annuities may not make sense for most military retirees, but for some , they are good vehicles to ensure sufficient income to enjoy the retirement you planned for you and your spouse. 


If you found this article useful, you might like the following blog posts:

Retired Military Finances 101: Do Annuities Ever Make Sense?


Is SBP Expensive?


To SBP or Not SBP?  That is the Question



  1. https://www.annuity-insurers.org/wp-content/uploads/2013/10/2013-Gallup-Survey.pdf

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