An annuity can be a great financial tool for your retirement. Depending on your situation, you could use an annuity to accumulate funds for retirement, to create guaranteed income that you can’t outlive in retirement, or both. When combined with other financial options, an annuity can help you reach better outcomes in your retirement.
But when should you add annuities to the mix? What is the best age to buy an annuity? To start, let’s briefly review what annuities are and the different types.
What is an annuity?
There are a number of different types of annuities designed to help with your retirement.
In general, annuities come in two basic forms:
Annuities that help you accumulate funds for retirement, which are typically referred to as fixed and variable annuities.
Annuities that create guaranteed income that you can’t outlive in retirement, which are known as income annuities.
While there’s no best age to buy an annuity, there are some times in your life when it may make sense to consider one.
You are close to or in retirement
As you approach retirement, you’ll likely want a range of financial options to help you get the most out of your savings. An income annuity can be a key piece of your retirement plan.
Immediate-income annuities, as the name suggests, start paying a guaranteed income that you can’t outlive, very soon after you buy one. If you’re about to retire and have yet to add an annuity to your plan, it’s a good time to consider an immediate-income annuity.
You are 5 to 10 years from retirement
If you have a few years until retirement, a deferred-income annuity can be a good strategy to beef up your financial plan. Deferred-income annuities are meant to create income that you can’t outlive in retirement. But unlike an immediate-income annuity, they don’t start paying out right away. Certain deferred-income annuities offer the opportunity to get additional income through dividends earned prior to when you start receiving payments.
This can be a great option, particularly if your investments have performed well and you’re looking to take some risk off the table as you get closer to retirement.
When you change jobs
If you’re changing jobs and need someplace to roll over an old 401(k), an accumulation annuity may be for you. This can be a particularly good move if you have a goal to eventually create guaranteed income in retirement.
There are two types of accumulation annuities:
Fixed accumulation annuities, which grow at a fixed rate. The advantage here is knowing exactly how much money you will have by the time the annuity’s term ends.
Variable accumulation annuities grow at a variable rate through exposure to the financial markets. The growth of these annuities is not guaranteed.
If you’re looking for an additional destination for your retirement savings
It’s common to first think about investment options through a 401(k) or IRA when you’re saving for retirement. And while you can use an annuity within an IRA, you can still contribute to an annuity if you’re maxed out on what you contribute to your 401(k) and IRA.
Saving additional dollars into an accumulation annuity can have tax benefits as accumulation annuities grow tax deferred. Another benefit is that you can make your contributions over time, rather than one lump sum payment (which is the case with some income annuities).
Given that annuities are viewed by the IRS as retirement vehicles, withdrawing too early can incur a tax penalty, as well as early surrender fees.
Should you buy annuities for kids?
Setting up an annuity for your children or grandchildren can be a great way to pass on a legacy. By using an annuity, you can ensure that they get a certain level of guaranteed payouts over time instead of a lump sum of money that you might pass on to them at some point.
The company where you buy your annuity matters
When researching annuities, focus on the companies offering them. After all, you’re putting your money and trust into that company’s hands for many years.
One way to evaluate a company is to look at its financial-strength ratings from top credit ratings agencies. Northwestern Mutual, which has been around for more than 160 years, has the highest financial strength rating of any U.S. life insurance company.
Are you on track for retirement?
See how much monthly retirement income you may have based on what you’re saving now.