Are You 'Too Old' to Benefit From an Annuity?

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Annuities are designed to help you save for retirement. But is it wise to buy an annuity in your 70s or 80s?

It can be. At this age, most people need and want to reduce their risk and generate reliable income — two things that annuities do well.

Whether an annuity will work for you depends on your savings, Social Security and any pension benefits, spending habits, health, age and risk tolerance.

A 71-year-old working part time is in a different situation than a retired 84-year-old. A type of annuity that's suitable for the former may be unsuitable for the latter.

Retirees turn to annuities — calm in a stormy environment

Investment markets are more volatile. While the stock market rewarded investors handsomely in recent decades, older Americans remember gut-wrenching drops in 2002, 2008 and 2022.

When you're middle-aged, you can fasten your belt and enjoy a wild ride on the financial roller-coaster. It's a different story when you're older.

Inflation has made an unwelcome comeback and may be around for some time. Health care costs are increasing. Premiums for both basic Medicare and Medicare supplements are rising.

More retirees are attracted by the guarantees offered by fixed annuities, which can guarantee principal and interest or can provide lifetime income and can help counteract the impact of inflation.

Fixed annuities are different from investment-oriented variable annuities, which offer tax advantages but don't guarantee principal, making them less attractive to older retirees.

It's simplistic to say that annuities are "good" or "bad" for people in this age bracket. I believe that most people in their 70s or 80s — except those with so little savings that they need full liquidity — could benefit from an annuity. But you must get the right kind for you.

Many people think of annuities as a product that guarantees a lifetime stream of income. But that's not the only type, and an income annuity may not always be the best choice for an older retiree, who may be better served by a fixed-rate annuity that can provide interest income and protect principal.

Income annuities: Make your own pension

An income annuity is like your own private pension. You send the insurance company a lump sum, and it contractually guarantees to pay you a stream of income, either starting almost immediately or at a future date you choose. You've converted your savings into a future income stream.

Income annuities are valuable because they can guarantee a steady income no matter how long you live, making them "longevity insurance." You can also choose a set period for benefits, such as 10 or 20 years, but most people take the lifetime option.

The disadvantage is that you no longer have access to your money. You've committed to the contract.

Someone in their early 70s in good health with good savings but no pension and modest Social Security benefits could be a perfect fit for a lifetime income annuity. They may be able to safely devote some savings to an income annuity.

If married, the person can choose an annuity that will keep paying the same benefits to a surviving spouse. Today, the odds are good that at least one partner will live past 90.

Insurance companies do have age limits on new income annuities. They typically won't underwrite anyone older than 85.

Fixed-rate annuities can substitute for CDs or bonds

Consider someone who's single, 82, not in good health and unlikely to live many more years and unlikely to get full value from a lifetime annuity. They will need access to funds and would look to secure savings vehicles.

These include CDs, bonds and deferred annuities. All have their place, but deferred annuities are often overlooked.

A multi-year guarantee annuity, or MYGA, is often called a CD-type annuity because it guarantees an interest rate for two to 10 years. If you cancel a MYGA before the term concludes, the insurance company will levy a penalty.

But many products allow penalty-free withdrawals up to 10% annually, providing valuable flexibility for retirees. Laddering MYGAs (staggering terms) also promotes flexibility.

"Nonqualified" annuities—those not held in a qualified retirement plan — offer tax advantages. They're tax-deferred: You're not taxed on interest earned as long as you let the interest accumulate in the annuity.

However, many will allow you to receive regular taxable interest payments if you like, which makes them suitable for retirees who want income while protecting their principal.

MYGAs can pay markedly higher interest rates today than CDs, with the top performers yielding from 5.70% to 6.30%, depending on the term. Some insurers will issue them for people in their late 80s or even their 90s.

MYGAs aren't guaranteed by federal deposit insurance, but they are guaranteed by the issuing insurance company. Insurers are strictly regulated for solvency by state insurance departments. Check the company's AM Best rating before buying.

Have a real conversation with your agent

Every annuity agent wants to make a sale and earn a commission. The best ones will ask questions to help you select the product that best meets your needs.

That's in the agent's long-term interest, too, because happy clients will spread the word to their friends. An agent who pressures you to make a snap decision isn't on your side.

If you're in your 70s or 80s, an annuity may or may not be a good choice for you. But you won't know unless you learn about your options.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356. The firm also offers an income-annuity quoting service. There are no fees or charges for the firm's services; 100% of the client's money goes to work for them in their annuity.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.