Millennials and Annuities: A Potential Supplement To Social Security

I know that we’re not supposed to like annuities, but in some cases they can actually make sense, depending on who you are, and what you hope to accomplish. In fact, I might consider an immediate annuity during retirement. I wouldn’t put my entire nest egg into it, but I might consider using a portion of it to purchase an annuity.

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What Benefits Can You Expect at Retirement?

An August 2011 survey by St. Norbert College’s Strategic Research Institute found that half of millennials ? people ages 18 to 29 ? do not believe Social Security will exist for their retirements. Though much of the skepticism is due to political banter and speculation about Social Security coffers already being empty, data from the government also reinforces these suspicions.

In 1999, the Social Security Administration itself said funds would run out by 2034. More recently, the 2012 annual report by the Social Security Board of Trustees projected that full benefits will not be available to all who are eligible by 2033. Meanwhile, the government announced a 1.5 percent benefits increase for all current recipients beginning in 2014.

Most millennials are thinking about paying back student loan debt, and starting their careers and families, as opposed to what they will be doing 40 years from now. Data from various economic think tanks predict benefits will in fact be there for Generation Y, but will not pay out the full amount expected. It’s never too early to start thinking of ways to hedge your financial future in the event the safety net of Social Security is extinct when you reach retirement age.

How Annuities Factor In

Most financial advisors without a vested interest will tell you annuities are an awful investment for anyone who isn’t at least 40-years-old (insurance agents and brokers will tell you otherwise). In the simplest of terms, an annuity is a contractual agreement between an insurance company and the owner of the policy. Annuities were originally a creation by insurance companies to circumvent tax laws. The annuitant, which may or may not be the owner of the annuity, is technically the “insured” individual under the policy. Thus, all funds paid into the annuity are tax-deferred until they are withdrawn (unless of course the policy is an immediate annuity).

The primary reason most advisors will balk at younger people buying annuities is the usually exorbitant commissions brokers make when they sell them. There is also the potential to lose money if you cash in the annuity before the end of the surrender period; most of which last from five to 10 years, according to Investopedia. However, many others require you to be at least 59.5 years of age to withdraw funds. But there are other escape routes from annuities if you need the money before retirement.

A 29-year-old buying an annuity today is (or should be) doing so to supplement their retirement, or fund it entirely in the event that Social Security is not there. If this is the route you choose, a fixed-rate annuity may be the best way to go. That way its value is not determined by the performance of the various mutual funds the money is invested in with variable annuities.

Do Your Research

This is just a general overview of how annuities could potentially supplement your income when you start approaching or reach retirement age. Precious metals and even crypto-currencies like Bitcoin could also be excellent long-term investments for a future return. If you decide to invest in annuities, make sure to read all the fine print. Retirement may seem worlds away, but the earlier you start thinking about it, the better and more enjoyable your golden years will be.

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