Annuities for Young Adults: Should Younger People Buy an Annuity?

Younger people should buy an annuity if it aligns with their risk tolerance profile and financial goals. It’s never too early to begin saving for retirement, but remember that some annuity companies have age limits and may not sell to young people.

Annuity contracts are a powerful insurance product because they offer a benefit that no other product can offer: a guaranteed retirement income.

Fixed annuities, in particular, are considered to be very safe investments. They offer guaranteed growth at a fixed minimum interest rate. That means you can be sure your investment will increase in value over time (as long as you don’t make early withdrawals). While the rates they offer are not as high as some other types of investment options, they are usually better than other similar safe investments like savings accounts or certificates of deposit (CDs).

Typically, such safe investments are most attractive to older individuals who are closer to retirement. But even young adults may prefer a very safe place to put their money over more risky options.

In this article, you’ll learn whether annuities are a good option for young people as well as which features may be more attractive for younger age groups.

How Young is Too Young for an Annuity?

First, there are no federally set legal age limits in the US; you are legally allowed to buy an annuity at any age.

Still, annuity companies often set their own age limits. For example, Canvas annuity sells annuity products to people between the ages of 18 and 90.

Even with age limits, some parents choose to buy an annuity for their children. They may do this to ensure that the child has a nest egg that’s safe from investment risk, earns a steady rate of return, and provides a guaranteed income stream in the future.

There really is no age that is too young for an annuity.

The critical point to understand is that annuities are particularly safe and grow your money steadily. Rather than think about them as better for people of a certain age group, it’s maybe more appropriate to think of them as appropriate for a particular set of needs.

Reasons Why Younger People Should Consider Annuities

So, when would a young person consider buying an annuity? Here are some common reasons.

Low Risk

Fixed annuities are low risk because they guarantee a fixed minimum interest crediting rate. For young people that have a low risk tolerance, annuities are among the best places to put your money.

Tax-Deferred Growth

Annuities offer tax-deferred growth. That means that rather than pay tax on earnings in the year you earn them, you pay ordinary income tax in the year you receive distributions. That means interest accumulates faster and grows faster compared to other investment options that aren’t tax-deferred.

Young people investing over a long period of time could benefit from this to a great extent over the years they’re saving. See here for more rules about annuity taxation.

Guaranteed Retirement Income

When you’re ready, you can annuitize your annuity and begin the payout phase, which is when you begin to receive annuity payments. Typically, you can choose between several payout options, including a lifetime payout. When young investors know they have secured a guaranteed lifetime income for their future, they may have more peace of mind about how they’ll afford retirement.

Reasons Why Younger People Should Not Consider Annuities

While there are several reasons why an annuity might be appropriate for younger investors, there are also reasons that other investment options might be more appropriate.

Limited Growth

Fixed annuities provide guaranteed growth at steady rates, but growth potential is limited. For young people that want higher growth potential—and are comfortable with higher risk—other investment options like mutual funds, index funds, or stocks might be more appropriate.

Some other types of annuities, like variable annuities and fixed-indexed annuities, also provide higher risk and higher growth potential, which younger investors might prefer.

High Administration Fees and Commissions

Some annuities have very high administration fees. These are especially common among variable annuities and fixed-indexed annuities. When young people put their money in annuities over decades, these fees can really add up.

Penalty for Early Withdrawals

Annuities are designed for long-term savings. Making early withdrawals can be expensive. You may have to pay surrender charges to the insurance company if you withdraw within the surrender charge period. In addition, the Internal Revenue Service (IRS) may levy a tax penalty of 10% on the money you withdraw before age 59½.

Young people who want their money available to them before retirement may prefer to put their money in a product where it is easier and less expensive to access it.

What is the Best Type of Annuity for Younger People?

For young people who want their money to grow over time, deferred annuities are usually the best option. Deferred annuities give you time to grow your money before it is paid back to you. Types of deferred annuities include fixed annuities, variable annuities, and fixed-indexed annuities.

In contrast, immediate annuities are usually less appropriate for young people because they would start to pay you back soon after you buy them. They don’t have a chance to grow over time.

Flexible premium annuities may also be appropriate for young people than single-premium annuities. With flexible premium annuities, you can contribute to your annuity account over time. This is better for young people who are still building their wealth and want to make smaller contributions over time.

In contrast, you have to fund single-premium annuities with a single lump sum. While this may be appropriate for young people who have already accumulated some savings, most young people don’t have those retirement savings accumulated yet. See this article for more on retirement savings goals by age.

When's the Best Age to Buy an Annuity?

There is no single best time to buy an annuity. The best time to buy an annuity depends on your needs and financial circumstances.

Many financial experts suggest that younger people have a larger part of their portfolio dedicated to higher-risk investments that can offer higher growth. These experts argue that if young people lose money, they have time to recover it before retirement.

On the other hand, experts usually recommend that portfolios for older people should include a larger proportion of low-risk investments. This will help ensure that they won’t lose their money going into retirement.

In both cases, annuities can make up that low-risk portion of the portfolio. So annuities can be a good choice at any age as long as the overall portfolio makes sense. If you’re not sure about what the best option for you is at your age, consider consulting with a qualified financial advisor.

Key Takeaways

Annuities can absolutely be a useful financial product for young adults. Fixed annuities, in particular, offer security because they provide guaranteed growth. They are fantastic for young people who have very low risk tolerances or who are looking to fill out the low-risk part of their portfolio.

The downside is that annuities are limited in their growth potential. They may not be as appropriate for young people with higher risk tolerance or who are trying to fill out their portfolio with higher-growth products.

If a fixed annuity sounds right for you, check out the products offered at Canvas annuity. Simple, no-nonsense annuities give you a safe place to put your retirement savings with zero commissions, account charges, or fees. Apply today.