Annuities are designed to provide you with a consistent stream of income for retirement. If you’re interested in adding an annuity to your financial plan, you may be wondering when you should consider purchasing one. The best age to buy an annuity according to financial advisors is typically when you’re 70 to 75. However, it’s important to consider your financial situation and goals when deciding how to time an annuity purchase. If you need more personal advice, consider working with a financial advisor.
What Is an Annuity?
An annuity is an insurance contract between yourself and an annuity company. You pay a premium to the annuity company, with the agreement that you’ll receive payments from the contract at a later date.
Annuities can be immediate or deferred. Immediate annuities typically begin making payments within one year of purchase. Deferred annuities may not begin payments until several years later. For example, you might buy a deferred annuity at age 55 and start receiving payments at age 65.
There are different types of annuities and the way they’re structured can determine how much your money grows. A fixed annuity offers a guaranteed rate of return while variable annuities deliver returns based on the performance of underlying investments.
Can You Buy an Annuity at Any Age?
It’s possible to buy an annuity for yourself as early as age 18, though annuity companies can set minimum and maximum age restrictions on who they sell to. For example, you might need to be at least 50 or under age 95 to purchase an annuity. Does it make sense to buy an annuity when you’re younger? It can, depending on the circumstances.
For instance, someone who wins the lottery at age 40 might choose to annuitize their payments versus taking a lump sum payout. A lottery annuity would allow them to receive structured payments over a set schedule. Lawsuit settlements can also be paid out as a structured annuity.
You might also purchase an annuity when you’re younger if you’re changing jobs. If your 401(k) plan offers the option, you might choose to roll your retirement savings into an annuity instead of rolling it into your new employer’s annuity or an Individual Retirement Account. Rolling a 401(k) into an annuity has pros and cons, so it’s worth having a conversation with your financial advisor to decide if it’s worth it.
If you’re talking about annuities as a retirement planning tool, the expectation is typical that you’ll be buying one a little later in life. So, instead of looking into annuities in your 40s, you might be waiting until your 50s, 60s or beyond to purchase one.
What Is the Best Age to Buy an Annuity?
The best age to buy an annuity can depend entirely on your situation, financial goals and retirement planning needs. If you ask financial advisors, the best age to buy an annuity is between the ages of 70 and 75.
Why that age range? The idea is that by this time, you have sufficient savings to fund the annuity and pay the premiums, while still having enough life expectancy left to maximize any payments you’re due to receive. If you’re married, you may decide to structure an annuity so that your spouse can continue collecting payments for the rest of their life once you pass away.
Waiting until your 70s to buy an annuity assumes that you’re still in good health and likely to remain so for the time being. It also allows you to avoid the possibility of having to pay any early withdrawal penalties that might apply if you’re taking money from an annuity before age 59 ½.
How to Decide When to Buy an Annuity
Choosing the best age to buy an annuity for yourself means understanding what you hope to get out of it and where you are currently. Age is an important consideration, as that can influence which type of annuity you buy.
- Early 30s to mid-40s: If you’re in your 30s or early 40s, purchasing an annuity might not make sense unless it’s a special situation like winning the lottery or settling a lawsuit. You may get better returns for your money without having to lock in a larger amount of cash by investing in stocks, mutual funds or other securities.
- Mid-40s to age 58: In this age range, you’re still not able to withdraw from your 401(k) or other retirement accounts without triggering a 10% early withdrawal penalty. While you’re funding your workplace plan or an IRA, you might also be interested in shifting some of your liquid cash into an annuity that can deliver additional growth as you ramp up for retirement.
- Age 59 to 69: If you’ve retired or are planning to retire in this window, you may be thinking of moving some of your assets into more conservative investment vehicles. Something like a guaranteed income annuity might appeal to you if you want to create an additional stream of income to minimize the need to make withdrawals from other retirement accounts.
- Age 70 and beyond: As mentioned, this age range is the sweet spot for buying an annuity, according to financial advisors. Income annuities might be attractive at this point if you’d like to supplement retirement account withdrawals or Social Security, of you’re looking for an income stream that can be used to pay for long-term care.
What to Consider When Buying an Annuity
If you’re interested in using an annuity as a financial planning tool, it’s important to do your research to understand how annuities work and which type might be right for you. It’s also a good idea to consider your needs for the near and long term.
Here are some helpful questions to ask as you start your search for an annuity:
- When will payments need to begin?
- What is my estimated life expectancy?
- Will annuity payments need to carry over to my spouse if I pass away?
- Is my goal for purchasing an annuity income or growth?
- How much can I afford to pay toward annuity premiums?
- Where does an annuity fit into my larger retirement income strategy?
It’s also important to thoroughly compare different annuity companies to find a reputable one to work with. One good way to do that is to check the company’s credit ratings with a service like Moody’s or AM Best.
An annuity company’s credit ratings are an indicator of how strong it is financially and how likely it is to be able to meet its financial obligations. The better the credit rating the better your odds of being able to collect all of the annuity payments that are due to you.
The Bottom Line
There is no single best age to buy an annuity and what makes sense for you might not work for something else. Getting to know the basics of annuities and evaluating things like cost, payouts and liquidity can help you pinpoint when you should consider buying one. The right decision for you will depend on your retirement plan.
Retirement Planning Tips
- Consider talking to your financial advisor about the range of annuity options you may have to choose from and what kind of returns you could generate for your money. You may also ask your advisor about any annuity alternatives that may be worth weighing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When comparing annuity options, pay particular attention to the fees. Annuities can charge a number of fees, including surrender charges if you decide that you no longer want to keep the contract after purchasing it. All of these fees can add to your total cost of purchasing the annuity so it’s important to know what you’ll pay upfront.
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