Annuities are investment instruments designed to provide steady cash payouts for older individuals, to supplement other financial assets during retirement.
You buy the annuity from an insurance company, put money in during the accumulation phase, and withdraw it during the annuitization phase (payout phase).
Immediate annuities allow people to exchange a lump sum (often a financial windfall) for guaranteed cash flow later in life, while deferred annuities use regular payments to fund tax-deferred investment growth.
But what is the best annuity purchase age?
Need for Liquidity Impacts Annuity Purchase Age
If you’re putting money into an annuity, you can’t put it into other types of investment that are higher risk and thus potentially higher return.
Younger individuals often have other large expenses, such as weddings, mortgages, or start-up capital for businesses.
And if you’re running a business, liquidity is valuable. Annuities lock up your money in a non-liquid form, and withdrawing early incurs significant surrender fees (typically starting at 10%), making them far from ideal for those relying on a business as a major income stream.
The illiquidity of annuities is a strong indicator that the first few decades of one’s working life are not the ideal annuity purchase age.
The Role of Risk in Financial Planning
The younger you are, the more risk you can afford to take in investing. This suggests that there is a lower age limit below which it is not a good idea to purchase an annuity.
What that threshold is – and which types of investment you plump for – depends on your risk tolerance and financial goals.
Although some people are more financially ambitious than others, experts won’t advise taking on risk that is excessive in proportion to your ability to recover from a significant loss.
Besides, annuity payouts are primarily determined by one’s life expectancy after the annuitization phase begins. Annuities are better income sources later in life, when you don’t need much liquidity and don’t have many more years to live.
Which Annuity Purchase Age Do Experts Recommend?
If one had to pick a perfect age to buy, it would probably be one’s early seventies. However, buyers begin purchasing annuities as early as forty, and the average age of first-time annuity purchase is fifty-one.
Immediate annuities begin paying out immediately. Young buyers receive far lower payouts than older individuals.
Deferred payout annuities allow you to grow your money for decades without the taxman taking a bite, and so purchasing one at a younger age is sensible. Variable annuities come with considerably more risk, making them most appropriate for young working people.
Because fixed index annuities provide great performance despite lower risk, they come with upper age limits ranging from seventy-five to eighty-five.
Multi-year guaranteed annuities (MYGAs) are capped at eighty-five, due to the risk incurred by the insurance company in buffering their clients against fluctuations in the markets.
Since so many factors affect purchase age, consulting a financial planner is essential.
Secure Your Financial Future
Ultimately, the best age to purchase an annuity is different for everyone – although the standard practice is to wait until you’re ready to start thinking about retirement.
Speaking to an annuity expert provides valuable clarity regarding annuity purchase decisions.