When Should You Buy an Annuity?

An annuity can be an important part of your financial strategy, particularly for retirement. Deciding to purchase an annuity is the first step – then you’ll need to decide when the best time is for you to take action. Here’s what you should know.

Why Choose an Annuity?

An annuity is a financial tool that helps you prepare for the future. In a nutshell, you pay into an annuity, then that money is invested by a life insurance company and ultimately results in you receiving a payout, which you can structure as steady, reliable income. This guaranteed income1 is most commonly used as part of a retirement savings strategy. Annuities can play an important role in having a diversified, tax-advantage financial portfolio that helps ensure you don’t outlive your retirement savings.

So, you’ve decided that an annuity would be beneficial for your financial future. When is the best time to take action?

Can You Buy an Annuity at Any Age?

There are no legal regulations on when you can purchase an annuity, though companies regularly set age ranges during which they allow specific products to be purchased. These ranges are meant to maximize the benefits for all parties, ensuring that people appropriately prioritize their financial strategies and the annuity works as it was designed to.

There is a myth called the “annuity age 75 rule” that suggests 75 is the best time to purchase because it maximizes payouts. However, that discounts many factors – such as your retirement goals, other financial accounts and the type of annuity you’re exploring. Additionally, waiting that long means you could be foregoing one of the main benefits of an annuity – guaranteed income in retirement – for many years.

When Is the Best Time to Buy an Annuity?

It depends.

Ideally, the best time to purchase an annuity is when you’ve established other retirement savings vehicles and are looking to diversify: you’re contributing to an employer-sponsored retirement plan to the maximum match rate and are putting money into an IRA. Now you’re looking for more options, perhaps something with lower risk to help balance your portfolio.

The type of annuity may also be a factor. Annuities can be single premium (you pay in once) or flexible premium (you can pay in multiple times). Many single premium annuities have a required minimum, such as $50,000, so you’ll need to be financially established enough to have that much to put in. This could be done with savings, an inheritance or rolling over an old retirement account.

In general, people purchasing annuities are approximately age 50-70. They are approaching retirement and have the financial capacity to put a large sum toward their retirement needs.

How to Determine When to Buy an Annuity

When you should buy an annuity depends on your situation; there’s no magic answer. Here are some factors that will impact your decision. 

Consider Your Retirement Goals & Income

What does your current retirement income look like and how does that align with your goals? It may be helpful to look at what you expect you’ll need in retirement and see if there are gaps that an annuity could fill. Because annuities typically provide regular income payments, it may be beneficial to consider how an annuity can cover your fixed costs (such as housing, utilities, insurance, medication and food) so other accounts can provide fun money.

You’ll also want to consider your current financial situation; because any money you put into an annuity cannot be accessed during the surrender period without paying a penalty, you’ll want to make sure that you aren’t putting too much aside for the future and leaving yourself in a bind now.

Assess Your Risk Tolerance

As you consider an annuity, it may be beneficial to talk with a professional about evaluating your tolerance for investment risk. Some types of annuities – such as fixed annuities and even indexed annuities – involve fairly little risk of loss. Adding one to your portfolio can help ensure that your money is working for you in the ways you are most comfortable with and providing a buffer for riskier investments. 

Consider Your Life Expectancy

If we had a crystal ball, planning for retirement would be easy because you’d know exactly how long your retirement would be. Without that insight, it’s helpful to consider your life expectancy as you consider your annuity options. 

If you expect to live a long time, outliving your retirement savings may be a concern. A deferred annuity can help with that because you pay in and then let the money grow for a number of years before you begin making withdrawals. Waiting may be beneficial if you expect to live a long time, as purchasing one young may mean you’ll pay more in fees throughout the years. On the flip side, purchasing one when you’re younger can provide peace of mind that you’ll be able to enjoy your retirement, however long it may be. As you get older, an immediate annuity might be more beneficial because payments get bigger as your life expectancy gets shorter. 

When Do Annuities Not Make Sense?

Annuities can be a beneficial tool, but they aren’t right for everyone at every time. It may not make sense to purchase an annuity if:

• You haven’t taken advantage of other retirement savings vehicles 
• You already have a pension
• Not having access to that money right now would put you in a tough financial position

Here to Help

While the answer to the question “when should I buy an annuity” is a complicated one, you don’t have to make that call alone. Talk to a local Farm Bureau agent, who can help you determine the right time and the right annuity to help meet your financial goals.