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Should I Buy an Annuity at Age 40?


Buying an annuity at age 40 could be an ideal step toward securing your retirement. This insurance contract can pay you a steady, guaranteed income based on how much money you put into it. But is it a good strategy for your retirement plan? Let’s take a look at how annuities work and whether you should get one at age 40. 

A financial advisor can walk you through the benefits and drawbacks of adding an annuity to your retirement plan.

How Annuities Work

An annuity is an insurance contract that could pay you a fixed income in retirement. You can buy it with monthly premiums or a lump-sum payment

These contracts are generally categorized in two ways: 

Immediate annuities are the most basic type of contract, in which you can make a lump-sum contribution in exchange for an immediate stream of income that can last for a period of years or a lifetime.  

Deferred annuities, on the other hand, are structured with more time to allow you to build up the cash value of your contract, while earning compound interest on a tax-deferred basis. 

Both annuities are designed to complement your overall retirement plan with an additional cash flow and therefore help protect you from the risk of outliving your assets.

Picking Between Fixed vs. Variable Annuities

Couple thinking about how to save enough for retirement

Depending on your risk tolerance, you’ll have to pick between getting a fixed or variable annuity:

  • Fixed annuities offer steady, periodic payments
  • Variable annuities make larger or smaller payments depending on the performance of the annuity fund’s investments

Here are some things to consider before buying a fixed or variable annuity:

While payouts from variable annuities are dependent on the performance of your investments, you could add on extra features through a rider to guarantee a minimum income or structure payments throughout your lifetime. 

These riders will cost you extra, but with a longer time horizon at age 40, you could benefit from the upside of those investments during the longevity of your contract.

However, if you’re conservative with your money, fixed annuities could be a more reliable choice since these pledge a certain payout that offers both stability and predictability. 

One note: If your fixed income does not get adjusted for inflation, and your cost of living goes up, this annuity may not be able to keep pace with your cost of retirement.

3 Reasons You May Not Want to Buy an Annuity

Beyond your risk tolerance, you should consider these contract limitations and fees:

  • Insurance companies are not insured by the FDIC or the government. So the benefits of your contract will depend on the company’s ability to pay them.
  • Annuities can charge a variety of fees. These include commissions, investment expense ratios, surrender charges and mortality and expense risk, among others. And these fees could be higher than other retirement income options. 
  • Your withdrawals could be limited to a percentage of the value of your account. Therefore, your money will be illiquid, which means that you can’t convert it easily into cash if you need to use it to pay for an emergency.

How Much Income Can You Expect From an Annuity at 40?

Many considers whether to buy an immediate annuity

As an example, let’s say you have $100,000 to put into a fixed annuity. If the insurance contract guarantees a 3% annual interest rate at age 40, then you could expect an annual payout of roughly $4,500 by the time you get your first annuity payment 25 years later.

This payout will vary depending on the size of your contribution and your payout rate, among other factors. But, investing in an annuity at 40 will generally give you more time to earn compound interest, which can add up to a higher income payment in retirement.

Bottom Line

Annuities can offer you additional income to help pay for your golden years. But these financial products can also carry a certain level of risk. So make sure you consider the contract limitations and fees, and compare the benefits of your annuity with other retirement income options.

Tips for Retirement Planning

  • A financial advisor can help you set up additional streams of income for your retirement. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you started saving for retirement late in your career and are worried that your savings won’t last, consider some of these retirement planning moves for late starters.

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