Buying an annuity at age 40: Does it make sense?

Annuities are insurance contracts that can convert your savings into guaranteed income, often for your lifetime. They can be practical tools for retirement planning, but tax treatment varies depending on the type of annuity. Gainbridge’s Fastbreak™ and Steadypace™ annuities are good examples of this: One is taxed annually, while the other is tax-deferred until the full term ends.

Buying an annuity at age 40 isn’t common. Most people wait until they’re closer to full retirement age of 59½ — but it can be a strategic move in the right situation.

Read on to learn more about buying an annuity at 40 to see when it can complement your retirement strategy decades down the line.

Buying an annuity at 40: What to consider

For the majority of 40-year-olds, buying an annuity doesn’t provide the best returns or growth potential. You’re far from retirement age, and other investment vehicles offer more flexibility and growth potential. However, buying early can lock in favorable rates and guarantee future income.

Here’s what to weigh when considering an annuity at age 40.

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Evaluate your liquidity needs and emergency fund

Having easy access to funds can help ensure you can handle near-term obligations without jeopardizing long-term plans. Before tying up money in an annuity, take some time to evaluate your liquidity needs. You’ll want enough accessible funds for emergencies or unexpected expenses. Most annuities come with surrender charges or early withdrawal penalties. If losing access to those funds would strain your finances, it’s best to postpone the purchase.

Consider Maxing out tax-advantaged accounts first

At age 40, retirement accounts like 401(k)s, IRAs, and HSAs can offer better tax benefits than annuity income. These vehicles help you build wealth during your prime earning years, with advantages like employer matches and tax-deferred growth. Maxing out these accounts before buying an annuity can help ensure you capture the full benefits from compounding and tax incentives.

Determine how the annuity fits in your plan

Most people in mid-career are focused on growth, which raises a big question: Why do guaranteed income and added protection matter so much right now? It could be that you’re looking for predictable future payouts or trying to diversify beyond market-based investments.

The clearer you are about where an annuity fits into your retirement strategy, the easier it is to choose an investment or decide if it’s even appropriate at this age.

Compare product types with attention to fees and riders

Different types of annuities have their own fees and optional riders. For someone in their 40s, high fees or unnecessary add-ons can erode long-term growth, since even small reductions early on can compound over decades. Before you buy an annuity, be sure riders like income guarantees and enhanced death benefits actually add value to your retirement plan.

Run the net-return and break-even math

Calculate your expected net return after annuity fees and compare it with traditional investments like stocks, ETFs or mutual funds. You’ll also want to look at the break-even point, which is how long it takes to recover your initial investment through annuity payments.

If you’re in your 40s and still decades from retirement, the long wait before annuity income kicks in can make these calculations less favorable.

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Age limit for annuity

There’s no universal maximum age for purchasing an annuity. Instead, insurance companies set minimum and maximum ages per annuity product.

Immediate annuities are typically priced for older buyers because payouts are largely based on life expectancy. On the other hand, you can purchase deferred annuities at almost any age. This gives younger investors the flexibility to contribute now and receive income in retirement.

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What is the best time to buy an annuity?

The best time to buy an annuity is personal, but it comes down to your financial goals and risk tolerance. Annuities can be effective when they’re part of a broader retirement plan and not a replacement for more growth-oriented investments.

When buying an annuity makes sense

The following are situations where purchasing a fixed annuity can strengthen your retirement plan:

• You’ve maxed out your 401(k) or IRA and are looking for predictable growth: After funding your tax-advantaged retirement accounts, you can use an annuity to put additional savings to work. This can give you future reliable income regardless of market performance.
• You’ve received a windfall you want earmarked for retirement income: If you’ve come into a lump sum like an inheritance, an annuity can turn those funds into a steady income stream to support your long-term savings plan.
• You’ve set an early retirement date: If you are over the age of 59 ½ an annuity can act as an income bridge until other sources start paying. It can fill the gap between retirement and the age at which Social Security, pensions, and other deferred income becomes available.
• You’re risk-averse and prefer guaranteed interest rates over market risk: If you’re uncomfortable with market ups and downs, an annuity can give you predictable growth. You can have financial security without exposing your savings to market fluctuations.

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When it’s better to wait

Here are common cases where delaying an annuity purchase can be the smarter choice:

• You need liquidity for near-term goals: Annuities tie up your money for years, often with costly surrender charges. If you’ll need cash in the near future, such as for funding college or buying a home, locking funds in an annuity could really limit your flexibility.
• You carry high-interest debt that should be paid down first: In most cases, using funds to reduce debt can be more beneficial than buying an annuity. Paying off high-interest debt provides a guaranteed “return” equal to the interest rate you’re avoiding.
• You expect higher returns from diversified market investments: If you’re decades from retirement, a well-diversified investment portfolio can give you much greater growth potential than the fixed or deferred returns of an annuity.
• You anticipate a higher interest-rate environment: Fixed annuity interest rates typically follow current interest rates. If rates rise in the future, waiting to buy could secure a larger, guaranteed income. But purchasing now may lock you into smaller payments or growth based on today’s lower rates. This is part of interest rate risk.

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FAQ

Can I buy an immediate annuity at age 45?

You can buy an immediate annuity at age 45. However, your payout will generally be lower than if you wait until closer to retirement because the insurance company typically expects to make annuity payments over a longer period.

Is buying an annuity at 40 a good idea?

Buying a fixed annuity isn’t optimal for most 40-year-olds, as other growth-focused investments can offer higher growth potential. It can make sense in certain scenarios such as being risk-averse and prefer a guaranteed interest rate or stream of income.

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Buy an annuity direct from Gainbridge

Planning for guaranteed income at age 40 can be a smart move if it fits your financial goals and risk tolerance. Gainbridge offers a straightforward, commission-free way to contribute to fixed annuities.

Gainbridge FastBreak™ is designed to support long-term planning without locking you into age-based withdrawal rules. And unlike many retirement accounts, FastBreak™ doesn’t impose the IRS 59½ early-withdrawal penalty when the term ends, as interest is taxed annually.  

Explore Gainbridge today to see how our FastBreak™ annuity can be a strategic fit if you want competitive fixed interest rates.

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This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

Annuities are issued by Gainbridge Life Insurance Company (Zionsville, IN). Gainbridge Life Insurance Company is licensed and authorized to do business in 49 states (all states except New York) and the District of Columbia. Products and/or features may not be available in all states. Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income. Because they are meant for long-term accumulation, most annuities have withdrawal charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Please visit gainbridge.com for current rates, full product disclosure and disclaimers and additional information.

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