Determining when to purchase an annuity can play a critical role in some retirement income strategies. Annuities are long-term insurance products that can provide a steady income stream during retirement. But when is the appropriate time to buy one? Here, we provide information to help investors make a more informed decision before purchasing an annuity.
The basics of annuities
An annuity is a contract between the insured and an insurance company where a lump sum payment or a series of payments is exchanged for regular disbursements. These payments start either immediately or in the future. Annuities may be suitable for individuals looking for a guaranteed income stream during retirement.
However, the timing of this purchase can influence its effectiveness and suitability for one’s situation and plan for retirement.
Age considerations
In your 30s and 40s
Purchasing an annuity at a younger age might seem unconventional, as annuities are typically associated with retirement planning. Still, early planning may provide more time for potential accumulation, depending on the terms of the annuity and market conditions.
Deciding when to purchase an annuity should be evaluated against other financial strategies and other investment vehicles.
In your 50s
This age group generally marks the beginning of serious planning for retirement. At this stage, individuals may have more disposable income and fewer financial obligations. Annuities may be a suitable choice for this surplus income or for transferring retirement savings from former employer retirement plans.
Furthermore, the tax-deferred accumulation feature of annuities may appeal to those in higher tax brackets who have maxed out their retirement plan contributions.
In your 60s and beyond
Purchasing an annuity in one’s 60s, or later, allows for immediate or shortly deferred income. For those just about to retire or already in retirement, an immediate annuity can begin paying out right away, providing a regular income stream.
Timing beyond age factors
While age is a significant factor, it is not the only aspect to consider; other factors include:
- Financial – Meeting financial obligations and saving for retirement without overly relying on the annuity income is essential.
- Health status – Annuities often become more advantageous for those who live longer due to the longevity risk pooling, which impacts annuity pricing. Health status can impact the cost or potential value of certain types of annuities.
- Market conditions – Prevailing market interest rates influence annuity rates. A higher interest rate environment might offer more attractive annuity rates.
To sum up, there’s no one-size-fits-all answer to the suitable age for purchasing an annuity. Consulting with a financial or insurance professional can help guide you toward an informed decision that aligns with your situation and goals for retirement.
SWG4705743 -0725d This information is provided as general information and is not intended to be specific financial guidance. Before you make any decisions regarding your personal financial situation, you should consult a financial or tax professional to discuss your individual circumstances and objectives. An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information.
In addition, Arista Financial specializes in providing strategies and guidance for those seeking a better retirement lifestyle. If you have five million dollars or $50,000 retirement savings, we can ensure it works as hard. As a result, we offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting!
