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At what age does an investment in an annuity make sense?


That depends on your health and life expectancy and whether you can cheat death, at least for a while. If you think you are likely to live longer than the average person of your age, sex and lifestyle, then it pays to hold off buying an annuity because rates are based on how many more years the insurance companies that offer annuities calculate that someone will live. Each year you wait reduces the number of payments that insurers expect to make to you, so each payment is larger. If you live longer than expected, then you will be receiving more payments, and each of them will be bigger because you waited to start collecting them. Your payments also will be bigger for having waited because you are likely to be making contributions into the annuity for longer, so the pot from which the payment amount is figured will be larger. If your health is poor, by contrast, and you’re likely to receive fewer payments than others of your age, then it might make more sense to start collecting as soon as possible.

There’s no way to know for sure whether you will live longer than insurance companies expect, of course, even if you exercise, eat healthy food and don’t smoke. But another factor that goes into setting the amount of annuity payments may be easier to determine: the level of interest rates. Rates went to their lowest levels in history last year due to some very unusual policies by the Federal Reserve that short-circuited the market mechanism by which rates are normally set. They have since started to come back up as the Fed has indicated that it will begin to undo its so-called quantitative easing. If you’ve got some leeway, you may want to wait until that process plays out and rates return to levels set the old-fashioned way, by expectations for inflation and economic growth. It’s reasonable to think that interest rates, and therefore annuity rates, will be higher at some point in the next few years.

-Conrad de Aenlle