Best Age to Buy an Annuity

There is no one age that makes the most sense to buy an annuity. The timing depends on your personal situation and the type of annuity you are interested in. Do you need money soon? Or are you able to wait until you retire to receive your payments?

Remember that buying and annuitizing are not the same things. Buying an annuity refers to the actual purchase of an annuity, either with a lump-sum payment or with monthly payments. Annuitization occurs when you receive your guaranteed stream of payments from the annuity investment.

You will probably want to annuitize later in life, although every situation is unique. Depending on how much value you wish to build up, purchasing the annuity itself may happen much earlier.

The type of annuity you want is a major factor in your purchase because the accumulation period can vary from type to type.

Annuities paid for in installments build up value over years. You should buy those earlier in life than those that involve a single lump sum contribution.

Other than having to be at least 18 years old, there’s no legal age cap or limit on buying an annuity. However, some annuity providers set their own age limits on who they will sell a product to.

These limits vary from company to company. Often, they’re upper age limits to prevent the purchase of an annuity when you’re past retirement age. That limit can range from the 70s to your 90s depending on both the provider and the type of annuity.

Insurance companies may set limits to ensure that annuity buyers are older, so an annuity may not always be a workable choice if you are in your 20s, 30s or even 40s.

There are also age limits regarding the annuitization of a purchased annuity. Tax penalties and early cash-out penalties can come into play if you take money out of your annuity before you turn 59½.

A major factor for when you should buy an annuity is the type of product that you’re interested in. Different annuities accumulate money in different ways, and that makes timing important.

Immediate annuities pay out soon after they’re purchased, so you people who are already retired or close to retirement may find them appealing. When people purchase an immediate annuity, they typically do so with a lump sum or else pay into it over a short amount of time.

The annuity pays out preset, periodic payments after a short but defined period, often 12 months. Opting for an immediate annuity might make the most sense if you already have a nest egg ready to invest or have already entered retirement.

But if you’re younger or still building your retirement savings, then a deferred annuity will likely be a better fit. A deferred annuity involves paying premiums into the product over a long stretch of time, steadily building up the value of your annuity over years. This route may make the most sense for younger buyers.

If you’re young and early in your retirement savings journey, an annuity may not be a realistic option for you and your circumstances.

According to a 2022 Transamerica study, the most common fear among today’s workers is the possibility of outliving their savings. Being proactive and saving early can ease those fears, and having the bulk of your savings tied up in an annuity that you can’t touch may not be advisable.

To get the most bang for your savings bucks, investing in an employer-based retirement plan can make fiscal sense. Many employees have the option to place part of their salary each month into a 401(k) or similar plan. Those contributions are then invested to grow their value over the coming decades. Employers sometimes match some of your contributions, helping your savings to grow faster.

If you don’t have access to a 401(k) through work, then an IRA may accomplish many of the same goals. Financial services companies have pre- and post-tax IRAs. If you’re self-employed, you can create an option of a Simplified Employee Pension Plan (SEP), whose annual savings caps are much higher than those for 401(k) plans and IRAs.

There are also one-off investment options to consider, including buying treasury bonds, municipal bonds or certificates of deposit. These can each grow your retirement money before it’s time to invest in an annuity.

These are low-risk alternatives that don’t come with a high rate of return but can help you grow money that you don’t need access to in the short term.