When it comes to planning your retirement, some experts will be sure to recommend an annuity, while others will strongly advise against. An annuity is designed to provide guaranteed income for life (pro) in exchange for significant lump sum payment (con). Annuities can provide a reliable income stream in retirement, but if you die too soon, you may not get your money’s worth. Compared to other tax-advantaged saving vehicles, an annuity isn't as simple as "Start saving ASAP!"
What is the best age to buy an annuity?
Determining the optimal age to purchase an annuity is an important consideration, as it can impact the income you receive. Here is some advice on picking the best age to buy an annuity.
Consider your life expectancy
The longer you expect to live, the more you can potentially benefit from the guaranteed lifetime income of an annuity. If you buy an annuity too early, you may not get the full return on your investment if you pass away sooner than expected. Most experts recommend waiting until at least age 65 to purchase an annuity, to better ensure you'll live long enough to receive a steady income stream for many years.
Delay until full retirement age for Social Security
If you plan on using Social Security benefits in retirement, delay buying an annuity until you reach full retirement age based on your birth year. This is currently age 66 or 67 for most people. Waiting allows your Social Security income to kick in, which you can then include when determining how much annuity income you'll need to supplement. Buying an annuity earlier results in less lifetime income.
Maximize your monthly payout
The older you are when you purchase an annuity, the higher the monthly payout will be since insurance companies calculate payouts based on your life expectancy. While most people retire around age 65, every year you delay buying an annuity will increase the monthly income. Maximize your payout by waiting until at least 70, or ideally between 70-75, to purchase an annuity.
Consider health and family history
Your personal health and family medical history should factor into when to buy an annuity. If you have chronic medical issues or a family history of shorter life spans, you may want to buy earlier than 70-75 years old. Relatively healthy people with good family histories can delay further to maximize the monthly payout.
The takeaway
With proper strategy, an annuity can provide peace of mind through steady payments lasting the rest of your life. And generally speaking, for someone with a reasonably healthy lifestyle, starting an annuity at a later age is the best option. If you’re young, it’s better to keep focusing on your more traditional tax-advantaged investments.
As always, you should consult a professional for your retirement planning needs. It's worth investing in a financial advisor who can review your finances, expected retirement lifestyle, and life expectancy to provide professional advice on the best age range to purchase an annuity. Be sure to read up on the difference between fee-based vs. fee-only advisors, as certain financial advisors may not have your best interests at heart. After all, when it comes to finding the right financial planner for you, the last thing you want is to get ripped off.