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Buying an annuity at age 40 could be an ideal step toward securing your retirement. This insurance contract can pay you a steady, guaranteed income based on how much money you put into it. But is it a good strategy for your retirement plan? Let’s take a look at how annuities work and whether you should get one at age 40.
A financial advisor can walk you through the benefits and drawbacks of adding an annuity to your retirement plan.
How Annuities Work
An annuity is an insurance contract that could pay you a fixed income in retirement. You can buy it with monthly premiums or a lump-sum payment.
There are two main types of annuity contracts:
- With an immediate annuity, you contribute a lump sum in exchange for income that begins right away and can last for years or a lifetime.
- Deferred annuities give your money time to grow, building cash value and earning compound interest on a tax-deferred basis.
Both annuities can add cash flow to your retirement plan and therefore help protect you from the risk of outliving your assets.
Picking Between Fixed vs. Variable Annuities
Depending on your risk tolerance, you’ll have to pick between getting a fixed or variable annuity:
- Fixed annuities offer steady, periodic payments
- Variable annuities make larger or smaller payments depending on the performance of the annuity fund’s investments
Here are some things to consider before buying a fixed or variable annuity:
Payouts from variable annuities depend on investment performance. You can add riders to guarantee a minimum income or lifetime payouts.
Riders cost extra, but at 40, a longer time horizon could help you benefit from the upside of those investments during the longevity of your contract.
However, if you’re conservative with your money, fixed annuities could be a more reliable choice since these pledge a certain payout that offers both stability and predictability.
Keep in mind: If your fixed income does not get adjusted for inflation, and your cost of living goes up, this annuity may not be able to keep pace with your cost of retirement.
3 Reasons Not to Buy an Annuity at Age 40
Beyond your risk tolerance, you should consider these contract limitations and fees:
- The FDIC or government doesn’t insure insurance companies. Your benefits depend on the company’s ability to pay.
- Annuities can charge a variety of fees. These include commissions, investment expense ratios, surrender charges and mortality and expense risk, among others. And these fees could be higher than other retirement income options.
- Withdrawals may be limited to a percentage of your account value. This makes your money less liquid in an emergency.
How Much Income Can You Expect From an Annuity at 40?
A 40-year-old purchasing a deferred income annuity today could receive monthly payments starting at age 60. Based on current estimates from Schwab, a male could receive around $1,550 per month at 60 under a single life contract, while a female might receive about $1,492. Waiting until age 70 increases payouts significantly—up to $3,199 for a male and $3,027 for a female.
Monthly Payouts for a 40-Year-Old Male
| Age | Single Life Only | Single Life With 10 Year Certain | Single Life With 20 Year Certain | Single Life With Cash Refund |
|---|---|---|---|---|
| 60 | $1,550 | $1,533 | $1,492 | $1,549 |
| 65 | $2,180 | $2,168 | $2,058 | $2,217 |
| 70 | $3,199 | $3,124 | $2,885 | $3,204 |
| 75 | $4,939 | $4,713 | $4,053 | $4,053 |
Monthly Payouts for a 40-Year-Old Female
| Age | Single Life Only | Single Life With 10 Year Certain | Single Life With 20 Year Certain | Single Life With Cash Refund |
|---|---|---|---|---|
| 60 | $1,492 | $1,478 | $1,447 | $1,492 |
| 65 | $2,086 | $2,056 | $1,984 | $2,080 |
| 70 | $3,027 | $2,960 | $2,770 | $3,022 |
| 75 | $4,602 | $4,418 | $3,879 | $4,596 |
Bottom Line
Annuities can offer you additional income to help pay for your golden years. But these financial products can also carry a certain level of risk. So make sure you consider the contract limitations and fees, and compare the benefits of your annuity with other retirement income options.
Tips for Retirement Planning
- A financial advisor can help you set up additional streams of income for your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you started saving for retirement late in your career and are worried that your savings won’t last, consider some of these retirement planning moves for late starters.
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