Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.
Key Takeaways
- Annuities provide a fixed monthly income either for a set period of time or for the rest of your life.
- The amount of monthly lifetime payments is determined by your age at purchase and your life expectancy.
- An annuity should not be your sole source of retirement income, as over the years inflation reduces its value.
A Secure Income Stream
For most retirees, the overriding concern is for a secure income stream for the future. As people live longer and rely more heavily on their own savings, the notion of converting a portion of that capital into a guaranteed income stream has its appeal.
Annuities traditionally had one purpose: to convert a lump sum of capital into a stream of income for life, or for a certain time period. They were designed for people who were retiring or otherwise needed a fixed, guaranteed monthly income. Today, there are various types of annuities that can be used to accumulate capital through investment, in addition to providing a guaranteed income.
When you buy an income annuity—also known as an immediate annuity or an immediate payment annuity—you enter into a contract with a life insurance company in which the insurer agrees to make fixed monthly income payments in exchange for a lump sum of money. This type of annuity starts paying income as soon as the policy has been initiated, in contrast with a deferred annuity, which doesn't start to pay out until years later.
Income annuity payments are guaranteed for your lifetime or for a specified number of years.
Fixed vs. Variable Annuities
Fixed annuities guarantee a minimum interest rate on money invested in the contract for some period. Then there is a renewal interest rate after that period ends.
The interest on variable annuities, in contrast, can fluctuate because it is based on the performance of the owner's investment portfolio for the annuity. Thus, fixed annuities have more predictable returns than variable ones.
How an Income Annuity Works
The monthly payout amount of an annuity is based on a number of factors, including your age and gender, interest rates, and the amount of capital invested.
Annuities are designed to pay out the full amount of principal and interest by the end of a certain period. If you want payments made for a 10-year period, for example, the payment amount will be based on the principal and total interest to be earned during that period, divided into 120 monthly payments.
If you want a lifetime income, the payment amount is calculated based on the number of months between your current age and your life expectancy age. If you are 65 and your life expectancy age is 80, the payment amount is based on 180 months. Even if you live beyond your life expectancy, the monthly payments will continue.
How Long Should I Wait to Buy An Annuity?
This depends on how long you expect to live, and what your lifestyle goals are.
In general, a shorter annuity payout period results in a higher monthly payment. If you want to maximize the guaranteed monthly payment, your best option is to wait as long as possible to annuitize your capital. Put another way: the longer you wait to annuitize your capital, the larger your monthly payment will be.
Waiting until a later age, of course, assumes that you're continuing to work or have other sources of income, such as a 401(k) plan, a pension, and/or Social Security benefits.
Can a 40 Year Old Buy An Annuity?
Any adult can buy an annuity. However, it is relatively uncommon among younger people. Annuities typically come with higher fees than other investment vehicles, and some financial advisors recommend maxing out other options—such as a 401(k)—before turning to annuities. Many younger investors cannot afford to do so, so annuities are typically reserved for older adults.
When Should You Not Buy an Annuity?
It is generally not advisable to tie up all—or even most—of your assets in an income annuity, because it is less liquid than other vehicles. And if you have enough savings in retirement plans, such as a 401(k), an annuity might not be right for you at all. If you're sure that you won't outlive your savings, there's no reason to sign up for an annuity and pay the comparatively high fees.
The Bottom Line
Investing in an income annuity should be considered as part of an overall strategy that includes growth assets that can help offset inflation throughout your lifetime. While a guaranteed income via an annuity may be highly desirable as insurance protection against longevity, it is a fixed income, which means it will lose purchasing power to inflation over time.
The best age to get an annuity depends on a number of factors, including your current circ*mstances and investments, risk tolerance, longevity prospects, and expected income needs in retirement. Given these factors, the best age to get an annuity is when you are able to optimize its benefits for your individual needs.
FAQs
Most financial advisors will tell you that the best age for starting an income annuity is between 70 and 75, which allows for the maximum payout. However, only you can decide when it's time for a guaranteed stream of income.
What is the best age to buy an annuity? ›
The best time to buy an annuity ultimately depends on your financial goals. The type of annuity you're interested in and how soon you want your payments to start are also important factors to consider based on your age. Many financial advisors suggest 70 to 75 as the best age to start taking annuity payments.
When would you buy an annuity? ›
One of the best times to buy an annuity can be when you're retiring. That's when you'll be thinking about changing your RRSPs and other registered savings into retirement income. An annuity can provide guaranteed lifetime income to cover basic living expenses during your retirement.
What age do you have to start taking from annuities? ›
If you take out money before you reach age 59½, you pay a tax penalty (unless you become disabled or switch your money to another annuity).
Who is the best candidate for an annuity? ›
If you expect to have a long retirement and can afford the payment, you're a good candidate for buying an annuity. Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics.
Should seniors buy annuities? ›
The bottom line. Annuities may make sense to consider for seniors — and that's especially true for those who are looking to generate a stable income or protect themselves from growing prices.
How much does a $250000 annuity pay per month? ›
Estimated Monthly Payments from a $250,000 Annuity
At age 65, monthly payments range from $1,387 for a single life with cash refund to $1,465 for a single life-only option.
When should you not buy an annuity? ›
When Should You Not Buy an Annuity? It is generally not advisable to tie up all—or even most—of your assets in an income annuity, because it is less liquid than other vehicles. 6 And if you have enough savings in retirement plans, such as a 401(k), an annuity might not be right for you at all.
What is the biggest disadvantage of an annuity? ›
Disadvantages of annuities
- High expenses and commissions. Cost is one of the biggest drawbacks of annuities. ...
- Difficult to exit. While it may be possible to get out of an annuity contract, it comes at a cost. ...
- Possibility of an insurer defaulting. ...
- Highly complex.
Annuity purchase interest rates in 2024 have displayed lower volatility compared to the end of 2023, however annuity purchase interest rates are unpredictable. This month the annuity purchase price increased for Annuity Plan 1 by 0.06% and decreased 0.22% for Annuity Plan 2.
The five-year rule requires that the entire balance of the annuity be distributed within five years of the date of the owner's death.
Why do financial advisors push annuities? ›
With an annuity—especially a fixed annuity—they know what their monthly income will be (and can budget accordingly). This saves them the task of managing their retirement portfolio, a plus for those who worry they aren't capable of managing their own portfolio.
What company has the best annuities? ›
- MassMutual. Best annuity company overall. ...
- Athene. Best for no-charge income and death benefit riders. ...
- Fidelity Investments. Best one-stop shop for annuities and investments. ...
- Allianz Life. Best for fixed index annuities. ...
- Pacific Life. Best for customer satisfaction. ...
- Nationwide. Best range of annuity options. ...
- PRUCO. ...
- USAA.
In general, 401(k) plans — and the very similar 403(b) plans offered by nonprofit organizations — are a better way to grow your cash for retirement than an annuity. For starters, 401(k) contributions are deducted from your taxable income, while annuity purchases generally aren't.
What is a good annuity rate right now? ›
What Are Today's Best Fixed Annuity Rates by Term or Rating?
| Term | Provider | Rate |
|---|
| 3 Years | Aspida Life Insurance Company Aspida Advisory MYGA | 6.05% |
| 4 Years | National Security Insurance Company MYGA | 5.70% |
| 5 Years | Atlantic Coast Life Safe Harbor Bonus Guarantee | 6.25% |
| 6 Years | Atlantic Coast Life Safe Harbor Bonus Guarantee | 6.30% |
6 more rowsSome people find fixed annuities to be a smart choice after maxing out IRA and 401(k) retirement contributions because they offer a guaranteed specific rate for a set period time. But this reliability can mean your money isn't very accessible and that earnings potential is limited.
How much does a 100 000 annuity pay per month? ›
Based on current annuity rates, this investment might yield a monthly income in the ballpark of $500 to $600. However, this estimate can vary based on whether you start income now or in the future, your age, your gender, and the how long you want your income to last (e.g., lifetime, 10 years).
How much does a $50,000 annuity pay per month? ›
Payments You Might Receive From a $50,000 Annuity
A straight fixed annuity is the easiest type of annuity to calculate a payment from. This is because fixed annuities work like bonds. If you use $50,000 to buy a fixed annuity paying 5% per year, for example, you'll earn $2,500 annually or about $208.33 per month.
How much does a $600000 annuity pay per month? ›
For instance, investing $600,000 in an immediate annuity could yield different outcomes depending on when payments begin. As of May 2024, starting payments at age 60 could result in an annual income of $43,200, which breaks down to approximately $3,600 per month.
