When should you buy an annuity?
Are you wondering about the best age to buy an annuity? It may depend on your situation.
Annuities are designed to generate guaranteed lifetime income.
When is the best time and what is the best age to buy an annuity? That depends on your individual circumstances and preferences. It also depends on the specific annuity age requirements, which are determined by the provider.
Annuities that provide a fixed monthly income payment immediately after purchase are known as immediate annuities. The amount doesn’t change, and you can’t outlive the payments. It is guaranteed income. These annuities are typically purchased in a single lump sum when you want to convert assets into an income stream right away — hence the term immediate. They may also be referred to as single premium immediate annuities.
Deferred annuities can generate an income stream at some point in the future. These can be purchased with a lump sum or with a series of payments over time. One benefit of deferred annuities is that the value of your annuity may grow over time before payout begins.
Deferred annuities offer tax benefits as well. Generally, interest is not subject to federal income tax until the money is paid out. This allows the annuity accumulation value to grow larger than if interest were taxed as it is earned.
The right time to buy
You can buy an annuity as young as 18 and well into your retirement years. Buying an annuity at 50 years old versus 30 is a personal decision based on your age, life expectancy, financial circumstances and goals. Financial advisors recommend starting annuity payments between the ages of 70 and 75.
Immediate annuities: These annuities make more sense to purchase when you are near or at retirement because the payout usually starts right away. Single premium immediate annuities begin payout as soon as purchase is made.
You could buy an annuity closer to retirement after allowing your investments to grow in a brokerage account or qualified retirement plan. Then, buying an annuity can be part of the retirement income plan you develop before retirement.
Deferred annuities: With a deferred annuity, the earlier you buy, and the younger you are, the more time your premiums can benefit from tax-deferred growth. An early purchase may be especially attractive if you have already contributed the maximum amount to other tax-advantaged accounts like an IRA or 401k. Deferred income annuities allow you to select a future date when you want payments to begin. They can work in combination with your overall investment portfolio.
Once you purchase an annuity, you have limited access to your money — it belongs to the insurance company, and you could incur costly charges and fees if you attempt to withdraw the funds early. Another disadvantage of an annuity is that your money might not grow as quickly as it could have if it had been invested in other options over the long term.
The right time and the best age to buy an annuity will ultimately depend on your needs and your situation. But it's never too late to consider adding an annuity to your retirement income plan. To determine when an annuity makes sense for you, contact your local State Farm® agent.