Should I Buy an Annuity at Age 40?

Locking in guaranteed retirement income at 40 might sound like a smart, forward-thinking move. After all, the earlier you plan, the more secure your future could feel. But annuities are complex, long-term contracts, and buying one too early could limit your flexibility and growth potential during some of your highest-earning years. Before committing, it’s important to understand whether an annuity at 40 truly aligns with your broader financial strategy.

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. There are two main types of annuity contracts:

• With an immediate annuity, you contribute a lump sum in exchange for income that begins right away and can last for years or a lifetime.
• Deferred annuities give your money time to grow, building cash value and earning compound interest on a tax-deferred basis. 

Both annuities can add cash flow to your retirement plan and therefore help protect you from the risk of outliving your assets.

Picking Between Fixed vs. Variable Annuities

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:

Payouts from variable annuities depend on investment performance. You can add riders to guarantee a minimum income or lifetime payouts. Riders cost extra, but at 40, a longer time horizon could help you 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. Keep in mind that 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 Not to Buy an Annuity at Age 40

Buying an annuity at 40 may seem like a proactive move toward securing guaranteed income later in life. However, annuities are long-term insurance products that are often better suited for individuals closer to retirement. At 40, you may have decades of earning potential and investment growth ahead, which can make locking up money in an annuity less advantageous.

1. You Have a Long Investment Horizon

At age 40, you likely have 20 to 30 years before retirement. That long time horizon can allow you to pursue growth-oriented investments that historically offer higher potential returns than many annuity products. Tying up funds in an annuity too early may limit your ability to take advantage of market growth and compound returns over time.

2. Limited Liquidity and Flexibility

Annuities often come with surrender periods and fees for early withdrawals. If your financial situation changes, whether due to career shifts, family needs or unexpected expenses, accessing your money can be costly or restricted. At 40, flexibility can be especially valuable as life circumstances continue to evolve.

3. Fees and Complexity

Some annuities, particularly variable or indexed annuities, can carry layered fees, including administrative costs, rider charges and underlying investment expenses. Over decades, these fees may reduce overall returns compared to lower-cost investment alternatives. Additionally, annuity contracts can be complex, making it difficult to fully understand the long-term trade-offs.

That said, annuities may still play a role in certain financial plans, particularly for individuals seeking future income guarantees or those who have already maximized other tax-advantaged accounts. Before committing at age 40, it’s important to evaluate whether the product aligns with your broader retirement strategy. Consulting with a financial advisor can help you weigh the potential benefits against the opportunity costs.

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

A 40-year-old purchasing a deferred income annuity today could receive monthly payments starting at age 60. Based on current estimates from Schwab ¹ , a male could receive around $1,550 per month at 60 under a single life contract, while a female might receive about $1,492. Waiting until age 70 increases payouts significantly, up to $3,199 for a male and $3,027 for a female.

Bottom Line

Buying an annuity at age 40 may offer future income guarantees, but it can also limit growth potential and financial flexibility during your prime earning years. With decades until retirement, many investors may benefit more from diversified, growth-oriented strategies and lower-cost investment options. Annuities can still serve a purpose in certain situations, but timing and product selection matter. Working with a financial advisor can help you determine whether adding an annuity at 40 fits your long-term retirement plan.

Tips for Retirement Planning

• A financial advisor can help you set up additional streams of income for your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with 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.

Photo credit: ©iStock.com/DragonImages, ©iStock.com/Prostock-Studio, ©iStock.com/jubaphoto