What age might be best to buy an annuity?

As you save for retirement, you might be considering an annuity as a way to generate a reliable income stream when your paychecks end. But you may be wondering if you should purchase an annuity while you're still working and saving or wait until closer to retirement.

When to buy an annuity depends on your financial situation as well as your goals, risk tolerance and physical health. Read on for considerations about what age to consider purchasing an annuity.

An annuity is a contract between you and an insurance company to cover specific financial goals. They're designed to be both a savings vehicle and a source of retirement income. There are four main types of annuities:

• Immediate annuities are designed to provide a lifetime payout starting within the year at the latest.
• Deferred annuities give you a guaranteed income in the form of a lump sum or monthly income payments on a date in the future, usually around retirement.
• Fixed annuities pay a guaranteed fixed interest rate on your investment for an agreed-upon period of time (the guarantee period).
• Variable annuities are a type of tax-deferred annuity contract that allows you to invest your money into subaccounts, similar to those in a 401(k).

The accumulation phase of a deferred annuity is when you have the opportunity to increase its value. You can fund an annuity with a single payment, but you also can build your retirement income through regular contributions over months or years. Any earnings from your annuity accumulate tax-deferred until you start making withdrawals.

In the distribution phase, you're ready to withdraw funds to create an income stream in retirement. You can tailor how long you take your annuity payouts, ranging from just a few years to payouts that are guaranteed to last your lifetime.

There's no one-size-fits-all answer. The best time to buy an annuity varies for each investor and depends heavily on individual factors, including financial goals, retirement plans, risk tolerance, health and life expectancy. While age 50 to 70 is often considered the prime age window to purchase an annuity, buying earlier or later can make sense depending on the situation.

Because different annuities provide varying features and benefits, the type of annuity you should consider can depend mainly on your age and years until retirement.

• Deferred annuities (including fixed and variable) are better for younger buyers (those aged 30 to 60) who have time both to contribute to the annuity and to let their investment grow.
  
  • Fixed indexed annuities are a type of deferred annuity that may be suitable for individuals between the ages of 50 and 70 who seek the potential for market growth while also protecting against downside risk.
• Immediate annuities, such as single premium immediate annuities (SPIAs), typically are recommended for individuals aged 60–75 as they maximize payouts during their retirement years.

Beyond the type of annuity you select, there are other considerations to keep in mind when choosing what age to purchase an annuity.

The older you are at the time of annuitization, the larger your payments can be. These larger payments are sometimes referred to as the "age 75 rule" because insurance companies offer higher payments to those with shorter life expectancies. However, you don't have to wait until age 75, and it may make sense to buy an annuity earlier, depending on your financial goals.

Annuities offer financial confidence through predictable income, which is particularly important during retirement. However, there are some tradeoffs. Early withdrawals before you retire may trigger penalties. Deferred annuities come with surrender charges, which typically last three to 10 years after you first acquire the annuity. The purchase of immediate annuities requires you to make a single, large premium payment, which can be a downside for people with short-term cash needs.

Be aware that many providers limit annuity purchases to people between the ages of 18 and 85, depending on the product.

Purchasing an annuity may not be the right move, depending on your age or your circumstances. If you're still working and saving and you think you'll need access to the funds soon, consider the possibility of surrender charges before purchasing an annuity. If you anticipate a strong and guaranteed base of retirement income from Social Security or a pension, you may not need income from another product.

The best age to buy an annuity varies for each investor. It's a personal decision, and many factors should influence your decision on when to purchase one—including your financial situation, retirement goals, risk tolerance and health. Contact a Thrivent financial advisor for personalized guidance on how annuities can fit into your overall financial strategy.