45 Versus 65: The Best Age to Buy an Annuity

Deciding when to buy an annuity can greatly affect your retirement income. While purchasing early (around 45) offers tax-deferred growth and lower premiums, waiting until 65 may provide clearer financial clarity and better income strategies.

While it may not be common knowledge, anyone over 18 can buy an annuity. Not many people do so, as the real benefits of landing a new annuity deal tend to favor older, more likely-retired Americans.

Fundamentally, the longer one waits to buy an annuity, the better the payout. Inflation can eat away at investment returns, even on popular products like fixed annuities. Yet choosing to purchase an annuity in your mid-40s has its upsides, too. For instance, buying an annuity at age 45 is usually a good idea, as contract premiums are lower at a younger age.

For the record, according to The Committee of Annuity Insurers, the average age when people first buy an annuity is 51. The actual average age of annuity ownership, however, is 70, and 65% of U.S. annuity owners are retired.

So what’s the best age to buy an annuity, and when does it make sense to wait – or not wait – to buy an annuity? Here’s a closer look, along with input from industry experts.

Buying Annuities Early

Americans who don’t wait for age 65 or 70 to buy an annuity have some built-in advantages.

“Annuities allow for tax-deferred accumulation potential, plus principal and accrued interest guarantees,” says David Byrnes, chief distribution officer at the retirement financial advisory firm Security Benefit.

“This can help retirement savers build and protect more assets over time, especially if the time horizon is 10 or 20 years ahead of time.”

Fixed index annuities, in particular, offer interest-crediting strategies based on market indexes.

“With extra time, the contract could focus on more aggressive index accounts, such as small-cap stocks, mid-cap stocks, technology stocks, commodities or international, to help boost interest earning potential while never actually being exposed to the markets,” Byrnes says.

Savers can also think of annuities as a separate asset class as they build assets along the way to retirement.

“A traditional 60/40 portfolio (60% stocks, 40% bonds) can be reallocated to 60% stocks, 20% bonds and 20% annuities to help diversify their holdings and reduce risk,” Byrnes adds.

Time Is A Commodity, Too. 

Having more time to save and invest for retirement is always an advantage.

“This is especially true when you are seeking to secure enough money to provide an income in retirement you can count on,” says Josh Anderson, president and CEO of Eagle Legacy & Financial in Eagle, Idaho.

 “Those who invest early enough in an annuity with income guarantees can contractually secure and grow those retirement income guarantees year after year. This means the earlier you start an annuity contract and the longer you have to defer annuity income, the better.”

Social Security Impactors

Just as some people defer Social Security to age 70 to maximize benefits, they can similarly maximize guaranteed lifetime income benefits in some contracts.

“This can be particularly advantageous for those who plan to retire before they can collect Social Security but as soon as they can avoid IRS penalties on tax-deferred accounts such as annuities, IRAs, 401(k)s and other qualified accounts,” Anderson says.

For example, someone who plans to retire at age 59-and-a-half could fund an annuity, guaranteeing income no matter how long they live. “Those who obtain an annuity contract at age 49 may see those income benefits increase by a guaranteed percentage rate, much like deferring Social Security to age 70, but these deferral bonuses can happen much earlier,” he adds.

Buying At 65

By 65, you have a clearer idea of your financial situation—how much you’ve saved, what your Social Security will be and how much extra income you’ll need.

“This allows you to make a more informed decision about how an annuity can fit into your overall retirement plan,” says Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth in Danvers, Massachusetts. “Some annuities, like immediate or deferred income annuities, are designed specifically for people nearing retirement, so waiting until 65 might make sense for those looking for a guaranteed income stream.”

For someone at 65 considering an annuity, Ambrose’s best advice is to understand exactly what you need.

“Make sure the annuity complements your other retirement savings, and shop around to find the best rates and terms,” he says. “Look for an annuity that gives you security but also flexibility, and pay close attention to any fees or restrictions in the contract.”

The Downside of Waiting Until 65

Unlike buying an annuity in one’s 40s or early 50s, there are myriad downside risks in waiting until age 65 or later to buy an annuity.

“For instance, if the assets are held outside of an annuity, savers face a host of risks leading up to their retirement age,” Byrnes says. “Besides ongoing stock and bond market volatility risks, interest rate risks and the impact of taxes, a major consideration is the sequence of returns risk or the risk of a major market meltdown right before or just in retirement.”

That can wreak havoc on a portfolio and may force changes in their retirement plans. “With annuities, assets grow tax-deferred and free from market risks,” Byrnes says.

Additionally, too many retirees fail to adjust their risk profile and protect themselves against economic downturns and market crashes as they near retirement.

“Age 65 may be too late to start thinking about these things,” Anderson adds. “The last thing you want to experience during the years just before retirement is a market crash of 40% or more, taking your investments and future income along with it. Annuities can help protect against this happening.”

The Takeaway on Buying an Annuity at Age 45 or 65

Buying an annuity at a certain age offers some universal factors investors need to know about, such as fees, taxes and income return strategies. Yet, there are differences from an age point of view.

“Purchasing an annuity earlier in life can provide for guaranteed lifetime income that you can never outlive if you want to retire early,” says Joseph Patrick Roop, president of Belmont Capital Advisors in Belmont, North Carolina. “Think of a professional player who earns a lot of income early in their career and needs it to last for the rest of their life: a single premium annuity guaranteed lifetime income, starting at any age.”

The way insurance companies structure annuity contracts may favor younger consumers, too.

“Insurance companies are constantly updating their mortality rates, and since people are living longer and longer, older contracts could have more favorable lifetime income payments than new contracts,” Roop notes. “If you purchase the contract in your 40s or 50s, you could potentially have a more favorable income than if you waited until age 65 to purchase the annuity.”

Older annuity investors have other decision-making concerns.

“When you buy an annuity at age 65, be sure to match the type of annuity with your particular needs,” Byrnes says. “If income is critical, for example, a fixed annuity might be a good option. Because they are intended to be held long-term, fixed annuities can often offer better rates than other vehicles like CDs, bank deposits or money market funds.”

At 65, many savers may be looking to protect their retirement portfolio but want to benefit from potentially rising markets. “In that case, a fixed index product could deliver both the principal guarantee they seek, plus interest crediting strategies based on various financial market indices,” Byrnes says.

Editor Norah Layne contributed to this article.