Thinking about an annuity? Here’s who should (and shouldn’t) buy one this August Clutch Fire

While the economic outlook is a bit tumultuous overall, the retirement planning landscape is particularly uncertain right now. After all, the stock market has been volatile recently, making it tough for soon-to-be retirees to ensure that their investments will perform as expected, and there are ongoing questions about the long-term viability of Social Security, too. So, when you add in the other issues, like fluctuating interest rates, persistent inflation concerns and an aging population grappling with inadequate savings, it makes sense that more Americans are considering annuities as a way to guarantee their financial future. 

But here’s the thing about annuities: They’re not the right move for everyone, despite what they may seem like on the surface. These unique insurance products, which promise to convert a lump sum into regular payments for life, can be incredibly valuable for the right person at the right time, especially those who prefer reliability over growth. However, purchasing can also be a costly mistake for others, as they may be locking up money that could be working harder elsewhere or creating unnecessary complexity in an otherwise straightforward financial plan.

So, while some people may get big benefits from investing in an annuity this August, for others, waiting — or choosing a different financial strategy entirely — could be the wiser move. Who should consider an annuity now, though, and who may want to steer clear? 

Compare your annuity options and find the right fit today.

Who should buy an annuity this August?

Here’s who may benefit from purchasing an annuity right now:

Near-retirees who want to lock in high rates now

Annuity payouts are directly tied to interest rates, so higher rates mean higher monthly payments for life. That means if you’re within a few years of retirement and are looking to secure a guaranteed income stream, this could be an ideal time to act. Right now, payout rates for fixed and immediate annuities are still elevated due to the Federal Reserve’s prolonged high-rate environment. As a result, your lump sum investment could translate into a higher monthly income than it might if you wait to buy until rates eventually decline.

For example, a 65-year-old who purchases a lifetime immediate annuity today could receive several hundred dollars more per month than someone who bought the same product just a couple of years ago when rates were sitting near record lows. And, if interest rates drop in the coming months — as many economists predict will happen — locking in today’s rates could provide long-term financial advantages.

Explore the top annuity rates you could lock in now.

Risk-averse seniors who prioritize certainty 

Many people have watched their 401(k) balances swing wildly over the past few years and would rather have guaranteed income than potentially higher returns. And, a well-structured annuity can be a powerful tool, especially when used in combination with other retirement income sources like Social Security or pensions. So, if you’re within a few years of retirement and the thought of market volatility keeps you up at night, an annuity might be exactly what you need. 

There is a wide range of annuities to choose from, but fixed annuities, in particular, offer guaranteed returns and aren’t subject to market swings. That can be reassuring for those who can’t afford a major downturn late in life. And, fixed indexed annuities, which offer limited market exposure with downside protection, can also be attractive for those looking for modest growth with low risk.

People without a pension looking for lifetime income

Pensions have become increasingly rare, leaving many retirees without a steady monthly paycheck in retirement. That can be a problem if you find that Social Security and your retirement savings won’t cover your basic expenses, let alone the lifestyle you’d hoped for. That’s where an annuity can come in handy. 

A lifetime annuity can function as a personal pension, providing predictable income for the rest of your life. By adding this type of annuity to your retirement portfolio, you’re essentially purchasing the pension you never had, a move that can be especially beneficial for singles or couples who don’t have heirs to leave assets to, or those who want the security of knowing their basic expenses will always be covered.

Who shouldn’t buy an annuity this August?

And, here’s who may want to steer clear of buying an annuity this August:

People who may need liquidity soon

One of the biggest downsides of annuities is that they tie up your money for long periods. If you think you’ll need access to those funds for a big expense, like a home purchase, medical costs or helping a family member, an annuity could do more harm than good.

That’s because early withdrawals from annuities often come with steep surrender charges and tax penalties. And once your money is annuitized (converted into income), it’s typically locked in for good. So, if flexibility is a priority, you’re better off keeping that money in a more liquid account, like a high-yield savings account or certificate of deposit (CD).

Younger investors with longer time horizons

If you’re still decades away from retirement, an annuity probably isn’t your best bet right now. Younger investors are usually better off focusing on tax-advantaged retirement accounts like 401(k)s and IRAs, where they can invest more aggressively and benefit from compound growth over time.

Annuities tend to prioritize safety and income over growth, which makes them more suitable for later in life. Locking in funds now could mean missing out on the higher returns that long-term equity investments typically provide.

Anyone carrying high-rate debt 

Before you even think about purchasing an annuity, be sure to pay off your credit cards, personal loans and any other high-rate debt you may be carrying. It makes little to no financial sense to lock money into an annuity earning 4% to 6% annually while carrying credit card debt with rates in the 20% range. 

The guaranteed return from paying off your debt almost always beats what you’ll get from an annuity, and you’ll free up monthly cash flow in the process. And this applies even if you’re nearing retirement. Debt payoff should typically come before annuity purchases.

The bottom line

Annuities can offer stability, predictability and peace of mind, especially in uncertain times like these. But whether now is the right time to buy one depends on your personal circumstances, not just market trends. If you’re nearing retirement, don’t have a pension or prioritize guaranteed income, this August could be an ideal time to consider locking in an annuity. On the other hand, if you’re young, need flexibility or haven’t finished paying off high-rate debt, it may be worth exploring other options. While the right annuity at the right time can help round out your retirement plan, the wrong one could leave you with regrets.