Annuities for Younger People

There are many reasons to consider the purchase of an annuity. That said, many of these reasons would make sense for someone approaching or in their retirement years.

It's not that there are no reasons whatsoever for a younger person to consider an annuity. There are, for example, tax advantages associated with variable annuities that might be compelling for a younger person--particularly if income and capital gains tax rates increase in the future.

Again, the above said, there are several other tax advantaged asset acccumulation vehicles such as 401(k)s, conventional IRAs and Roth IRAs that might be more efficient/less expensive. Municipal bonds might also be a consideration if taxes are a real concern.

It probably makes most sense to focus on the real strengths of annuities and what makes them different from any other financial vehicle. The real strength is simply that annuities can provide guaranteed income, and that this guaranteed income can be structured so that it provides protection against longevity risk or the risk of outliving one's assets.

As a younger person, you are in your prime earning years. You are accumulating financial assets rather than decumulating and living off of those assets. You are also likely wealthy in terms of human capital or your future earning potential. As a result, guaranteed income and hedging against longevity risks are likely not front-and-center concerns for you any time soon.

Younger people (30s - 50s) may, however, want to consider variable annuities because of certain living benefit guarantees that can be associated with the products.

For example, certain variable annuity features allow for a lock-in of gains during years in which the underlying investments perform well. The value of the variable annuity contract "steps-up" based on the favorable investment returns and is locked-in for the life of the contract--regardless of what the market does in future years. This feature has proven extraordinarily valuable for people over the past couple of years.

It would be very difficult for a retail investor to replicate these guarantees on their own.

Tax advantages are nice, but the real value that might justify consideration by younger people resides in some of the living benefit guarantees associated with variable annuities--they can provide downside protection from market volatility which results in higher levels of guaranteed income in retirement.