The Best Age To Buy an Annuity
Determining the best age to buy an annuity is a unique decision tailored to the individual annuity purchaser. Typically, annuity buyers are between age 45 to 75 — but the best type of annuity may differ for each age group in that range. You should carefully consider your individual financial situation and goals to determine the right purchase age for your set of circumstances.
Annuities provide a fixed monthly income which can give you a steady stream of lifetime payments or payments throughout a set period of time.
The amount of money you receive from this monthly income over your lifetime is determined by the age at which you buy an annuity and your life expectancy. Deciding on the ideal age to buy an annuity depends on your personal lifestyle, financial situation and goals.
Is There an Optimal Time To Purchase an Annuity?
“It really kind of depends on the annuity investor, but I’d say that sweet spot is anywhere from 45 to 70 years old,” Joe Liekweg, a licensed agent at Insuractive told Annuity.org.
But the reasons for buying an annuity may vary for different age groups within — and for people outside — that range.
- At Any Age
- A multi-year guaranteed annuity (MYGA) may be an option for anyone at just about any age because these types of annuities guarantee interest. MYGAs “can beat the bank and give you a better return than letting the money sit in a savings account or CD,” Liekweg said.
- Ages 30 to 44
- If you’re on the younger end of the age spectrum, you may want to consider alternative financial products when planning your retirement. Consider that you will have limited access to your money once it’s been used to purchase an annuity. If you are in your 30s or 40s, this is money that you might prefer to put into retirement investments with greater risk but potentially greater payoff.
- Ages 45 to 58
- People in this age group can benefit from an annuity buying strategy aimed at accumulating value before retirement. This is especially true if you are thinking about moving over qualified money — money that’s never been taxed — such as from certain retirement accounts like 401(k)s and IRAs.
- Ages 59 and Above
- Because of withdrawal penalties that expire when you turn 59 years and 6 months old, buyers in this age group are likely to benefit from buying an annuity for lifetime income and tax deferment — especially if they are moving qualified money into an annuity.
- Ages 70 to 75
- Many financial advisors suggest age 70 to 75 may be the best time to start an income annuity because it can maximize your payout. A deferred income annuity typically only requires 5 percent to 10 percent of your savings and it begins to pay out later in life. It’s a hedge against outliving your retirement portfolio, providing you with guaranteed income later in life.
These are simply examples of different types of annuities to consider at different stages of life. A professional financial advisor can help you determine the best annuity option for you at any age.
Questions To Consider Before Purchasing an Annuity
Annuities can provide a guaranteed lifetime income, but they carry their own sets of risks and tradeoffs when it comes to retirement planning.
When buying an annuity, it’s important to shop around. It’s also important to understand what type of annuity is right for you.
Consider when you’re buying and when you plan to use the income. For example, you may want a higher level of guaranteed income over your lifetime or you may want a deferred income annuity that kicks in as you get older, giving you a cushion so you don’t outlive your savings.
- 1. When Will You Need the Money?
- Do you need the money now or can you afford having limited access for a period of time? Answering this for your situation will help you decide which type of annuity to buy. You can buy a single premium immediate annuity with a lump-sum payment and get a steady income right away, or you can choose to purchase a deferred annuity that will provide money later on.
- 2. How Much Will It Cost?
- The type of annuity you choose will determine the cost. Add-ons and extras, called riders, will also affect the price. Make sure you ask about commissions and fees, which are usually included in the purchase price or reflected in the payments.
- 3. What’s Your Life Expectancy?
- How long you’ll live factors into the return on your annuity. Consider your health and gender, and how they affect life expectancy. If you are healthy and your family has a history of living longer, you’ll need to determine if the annuity’s income stream will keep up with inflation over time. If your life expectancy is shorter — is the payout too little?
- 4. What Are Your Risks?
- An annuity income stream that fails to keep up with inflation is one of the biggest risks to consider when choosing the right annuity for you. Also consider the fact that you will have limited access to your money and any potential growth you may have otherwise experienced in exchange for the income from an annuity.
- 5. Will the Annuity Work Well With Your Other Income?
- Consider all your other retirement income — Social Security, government or private pensions, 401(k) plans, IRAs or other retirement savings plans. Think about how these will off-set the risks that annuities present regarding inflation and your life expectancy. This is a two-way street: You also need to consider how an annuity may positively off-set the chance that you’ll outlive your retirement savings.
Immediate vs. Deferred Income
Annuities give you the option to choose immediate or deferred income; in essence, you choose whether you start receiving income right away or at a later date after you’ve built up your annuity’s value over time.
- Immediate Income
- An immediate annuity requires one lump-sum payment, or premium. The premium is converted into guaranteed monthly income for a specified period of time — from a few years to the rest of your lifetime. You can start receiving the income within a year. Older annuity buyers, especially those nearing retirement and looking to defer taxes on retirement savings, may want to consider an immediate annuity.
- Deferred Income
- Deferred annuities allow you to make a lump-sum payment or several payments over time to purchase the annuity. In exchange, you can start withdrawing money from the annuity starting anywhere from 13 months after the purchase date to years or even decades in the future. This is an option best suited for younger annuity buyers looking to add an annuity to their portfolio while still building up value over the years until their retirement.
Choosing between immediate and deferred income annuity options depends on your age when you buy the annuity, the age at which you retire and how you want to structure your premium payment or payments.
Considering all of the options can give you a clearer idea of what kind of annuity is best for you and talking with a professional financial advisor can help you narrow your options to the right fit for your financial situation.
8 Cited Research Articles
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