I have heard lots of things about annuities, but one thing that remains unclear to me is: when should I consider buying one??
It depends on what you want the annuity for. There are two main purposes to annuities: (1) guaranteed growth and (2) guaranteed income.
(1) Guaranteed Growth
This is what you get with a CD-like annuity, called a multi-year guaranteed annuity or MYGA. You commit to leave your money with an insurer for a set period of time (3-10 years) and get a guaranteed interest rate in exchange. You can buy this at any age, and it can be rolled over into a new MYGA or an IRA once it’s done.
(2) Guaranteed Income
This is what you get with an income annuity, wither immediate (income starts now) or deferred (income starts later). Unlike with the MYGA, this purchase is permanent – once you buy it, your money has been permanently converted to income and cannot be redeemed in any other way.
The latest you should buy this is when you need the income, in which case you’d be getting an immediate annuity at or around retirement. The earliest you can get it is 40 years before you want the income to start (so if you want the income to start at 70, that would be 30).
If you’re in your 30s - 60s and have some of your retirement savings in bonds, you can consider moving some of that over to income annuities. It has a very similar risk profile, provides the diversification you’re looking for, and also provides longevity protection. Having 1/2 of the retirement savings you want invested conservatively in income annuities and 1/2 in bonds is a good rule of thumb. I’ve written a white paper about this, which you can read here.
I agree with LM’s response. Annuities serve 2 main purposes, income and growth. So, most pre-retirees can find good reasons to have both. Even in one’s early 30s buying future income streams can start someone off on the right track for locking in retirement income. And the cost is pretty low if the income doesn’t start for 20-30 years. At the same time people want to accumulate wealth so buying a plain old deferred annuity will help to do that. Having a diversified portfolio of fixed income investments (accumulation annuities), income annuities and equities is what I have tried to do.