When should you buy an annuity?

An annuity is a contract that converts a lump sum into a reliable income stream, and it’s one of the few retirement decisions where age may change the math. Payouts, tax implications and the role an annuity plays in your income plan all shift depending on when you buy. The right approach may look different in your 50s than in your 60s or 70s.

Why timing matters with annuities

Annuity payouts are based partly on life expectancy. The older you are when income payments begin, the higher your monthly payout is likely to be, because the insurance company expects to make payments for a shorter period of time. That dynamic makes timing one of the more important variables in the decision.

For deferred annuities, which delay income payments while your savings grow, buying earlier gives your money more time to accumulate at a guaranteed interest rate, but the trade-off is access. Once you put money into an annuity, it is not as readily available as other savings. If you withdraw funds from a tax-deferred annuity before age 59½, the IRS may assess a 10% penalty in addition to ordinary income taxes.

While annuities can technically be purchased as young as 18, most people do not start seriously considering them until their 50s at the earliest.

Buying an annuity in your 50s

Your 50s are a reasonable time to start exploring whether an annuity belongs in your retirement plan, even if you’re not ready to buy yet.

A deferred fixed annuity can be a good fit if you’re looking for a low-risk place to grow a portion of your retirement savings. Your money grows at a guaranteed interest rate, tax-deferred, until you’re ready to start taking income. This can be especially useful if you have already contributed the maximum to other tax-advantaged accounts, like an IRA or 401(k), and are looking for another way to grow savings. Converting that accumulated value into reliable lifetime income is ultimately what a deferred annuity is designed to do.

That said, your 50s are also when flexibility often still matters. If you have not yet fully funded other retirement accounts, or if you may need access to this money in the shorter term, locking a large sum into an annuity may not be the right move just yet.

Buying an annuity at or near retirement (60s and 70s)

For most people, the 60s and early 70s represent the most common window for purchasing an annuity. This is when guaranteed income starts to feel more urgent, and when the math often works in your favor.

If you need income to begin soon, an immediate annuity converts a lump sum into a stream of payments that can start soon after purchase. Payments continue for as long as you live. Common funding sources include an IRA or 401(k) rollover, a maturing CD, an inheritance or proceeds from a life insurance payout. Some immediate annuities include an option to increase your payments each year, which can help keep pace with rising costs over time.

If you’ approaching retirement but do not need income right away, a deferred income annuity lets you lock in reliable future income now while you wait to collect. The longer you defer, the higher your payout tends to be. For those with funds in a qualified retirement plan or IRA, a Qualified Longevity Annuity Contract (QLAC) can allow you to delay a portion of your required minimum distributions (RMDs) until age 85.

When an annuity might not be the right fit for you

Annuities are not the right tool in every situation. Here are some circumstances where it may make sense to hold off:

• You have not yet contributed the maximum to other retirement accounts: IRAs and employer-sponsored plans like 401(k)s typically offer tax advantages that may be worth prioritizing first.
• You may need the money soon: Annuities are designed for the long term. Early withdrawals can trigger surrender charges and potential IRS penalties, so they work best when you’re confident the funds can stay in place.
• You already have enough reliable income: If Social Security and a pension together cover your essential retirement expenses, an annuity may add less value than other investments.
• You’re still in the earlier stages of building wealth: Younger investors (30s-40s) generally benefit more from the growth potential of market-based accounts than from the guarantees an annuity provides.

Questions to help you decide if and when to buy an annuity

There is no formula that works for everyone, but working through these questions can help clarify whether the timing is right for you:

• Do I need guaranteed income to start soon, or at some point in the future?
• Have I already contributed the maximum to my IRA or 401(k)?
• How much flexibility do I need with this money over the next several years?
• How much market risk am I comfortable carrying into retirement?
• What does my retirement income picture look like overall, including Social Security and any pension?

If most of your answers point toward needing income soon, limited flexibility and a preference for lower risk, that is a reasonable signal the timing may be worth exploring more seriously. If your answers lean the other direction, it may make sense to revisit the question as your retirement picture becomes clearer.

A local State Farm agent can help you work through these questions, identify the right type of annuity for your situation and figure out when the timing makes sense for you.