When is the best time to buy an annuity? A strategic guide to retirement planning

Retirement planning is multifaceted, but it often comes down to a common goal — creating cash flow in retirement.

Saving for retirement is only half of the job; the harder reality is turning that savings into a dependable income stream. It’s no surprise, as 67% of Americans fear running out of money more than death, according to Allianz Life.

Annuities can be a good solution to this problem, but they’re not without controversy. Some financial advisors love them, while others warn of costly fees and limited liquidity.

There’s a middle ground where buying an annuity may make sense. This guide explains how annuities work and when it may make sense to purchase one.

How annuities work: The fundamentals you need to know

Before purchasing any investment, it’s important to know how it works and how it fits into your portfolio.

The basic annuity structure

An annuity is a contract between you and an insurance company. The purchaser contributes a lump sum or adds money over time to generate income payments over a specific period. Insurance companies can do this by spreading risk across numerous annuity holders.

Keep in mind that an annuity isn’t primarily an investment vehicle. “The whole point of buying an annuity is to transfer your ‘longevity risk’ to an insurance company that will pay you income for the rest of your life. If you want growth, stay in stocks. If you want guaranteed income, purchase an annuity,” says Eric Croak, CFP^®, president at Croak Capital.

Types of annuities at a glance

There is more than one type of annuity available, and some may be a better fit than others.

• Immediate annuities: Optimal for retirees; payments often begin within one year of purchase
  
• Deferred annuities: Ideal for people still working; they create income for a future date, allowing the contract to grow over time
  
• Fixed annuities: Provide guaranteed payments for people seeking a predictable income
  
• Variable annuities: These introduce market-based performance, which increases uncertainty. Returns can be higher, but with heightened risk
  
• Indexed annuities: These include limited market exposure, typically with downside protection. Indexed annuities offer a good middle-ground solution for people comfortable with more risk.
  

Different annuity types solve different problems. A person trying to buy an annuity at age 40, for instance, may have distinct concerns from a soon-to-be retiree.

Understanding annuity payments: Real numbers

Overwhelm is an understandable feeling when reviewing annuity contracts. Understanding how much an annuity can provide in monthly income is essential.

A $100,000 immediate annuity for a 65-year-old, for example, could pay roughly $500 to $600 monthly. On the flip side, a $500,000 annuity could yield $2,500 to $3,000 monthly.

If you want to generate $1,000 in monthly income, it’s fair to expect to purchase an annuity of $180,000 to $200,000.

Keep in mind that the exact amount you can expect to receive depends on age, gender, current interest rates, payout options, and annuity riders you purchase.

When to buy an annuity: Timing and life stage considerations

Timing typically depends on age, retirement readiness, and when income will be needed.

The age factor in annuity purchasing

Deciding when to purchase an annuity should not be approached casually. Buying an annuity in your 50s may seem wise, but it is traditionally advisable only if you have significant wealth and want to create a lifetime income floor.

Unfortunately, that may result in lower payouts. Prioritizing maxing out tax-advantaged retirement accounts is typically a better first step.

“…65 to 70 is the ideal time to buy because you’re close enough to retirement that you can pretty accurately predict your expenses but far enough out that your money can continue to grow tax-deferred,” adds Croak.

You may even hear of the annuity age 75 rule, which states you should wait until 75 to purchase an annuity. Following this may result in higher payments, but your needs and protection against longevity risk may matter more.

This is important as payout amounts generally increase 0.5% to 1% annually as you age, which can dramatically influence lifetime income.

The best time to buy an annuity is not a cookie-cutter formula. You must consider your retirement goals, other income streams, and risk appetite in making the decision.

Market conditions and interest rate timing

The broader interest rate market significantly impacts payout rates. For 2026, interest rates are relatively stable, which may make annuities still an attractive option for retirement planning.

People interested in fixed or income annuities may find that it’s still a good time to lock in a guaranteed rate. LIMRA agrees, saying sales will remain strong in 2026. If rates were to increase, waiting six to 12 months could be beneficial.

Variable or indexed annuities may be less clear as they can be influenced by fees plus interest rates.

Life events that trigger annuity consideration

You may find that certain life events may trigger your desire to purchase an annuity. Possibilities include:

• A planned retirement or job transition
  
• A substantial inheritance
  
• A divorce settlement that divides retirement assets
  
• A health issue that impacts retirement schedule
  

Regardless of the event, an annuity often enters the mind when there’s a desire to make part of your retirement plan more predictable.

Key factors to consider before buying an annuity

Even if timing feels right, due diligence is important when deciding to purchase an annuity.

Evaluate your primary motivation

There are various reasons to buy an annuity. Good motivations to purchase an annuity include:

• Longevity protection: Are you concerned about outliving your savings? An annuity can protect against that
  
• Income gap: You need to bridge the gap that Social Security or retirement accounts can’t cover
  
• Peace of mind: Market swings make you feel uneasy, and you want a stable income stream
  
• Simplified management: You don’t want to actively manage retirement account withdrawals
  

If the advisor says you “can’t miss the opportunity,” or you don’t understand the fees and restrictions, you may not want to purchase.

“Overall, annuities offer peace of mind by providing a steady paycheck, and can be used as supplemental income in retirement, or as an extra income stream to use for health insurance,” says Jason LaBarge, president and financial advisor at LaBarge Financial.

Financial health assessment checklist

Buying an annuity is not a process to take lightly. You want to evaluate your finances fully. That includes:

Emergency funds: Liquid savings are a must for retirees. Having at least 12 to 18 months of living expenses is prudent. Using a high-yield savings account can help here. Annuities have surrender charges for up to a decade. If you need to make an early withdrawal, you’ll get hit.

Debt: Paying off high-interest debt is typically best before buying an annuity. If your mortgage rate is over 5%, you may want to pay it down before getting an annuity.

Healthcare costs: Managing healthcare costs can be burdensome in retirement. Out-of-pocket costs, premium costs, and more must be considered. Having long-term care insurance may make an annuity more feasible.

Other retirement income sources: Look at your retirement income holistically. Combine Social Security plus pensions and a possible annuity to learn where you stand. Then analyze your expenses. You want to cover at least 70% of your essential expenses with guaranteed sources of income.

Fee structure and contract terms

Annuities can include multiple fees and confusing contracts.

Comparison shopping and deciphering each contract are good ways to cut through the noise and find a fit for your needs.

“Read the fine print when purchasing annuities. There can be specific details about an annuity you’re considering, including how quickly it will grow over time and when you can benefit from it. Some annuity rates can change over time. In addition, annuity scams can cost you a lot of money. It’s important to read carefully,” notes LaBarge.

When you should NOT buy an annuity

Purchasing an annuity can be hard to reverse. Understanding when not to buy one is just as important as when to buy one.

Financial situations that make annuities the wrong choice

Annuities may be a poor fit when you require flexibility. Possible circumstances that make an annuity a bad purchase include:

• Inadequate and inaccessible savings
  
• You have lots of consumer debt
  
• Liquidity is essential to managing your finances
  
• You have at least $2 million in investible wealth
  
• Your life expectancy is below average
  
• You’re too young
  

The last thing you want is to regret the purchase. “In my experience, buyers who purchase any product that locks up their money before age 60 usually come crawling back within 24-60 months. Life happens,” notes Croak.

Smart alternatives to annuities for retirement income

An annuity is just one way to create income streams in retirement. Other strategies may work better for you. You don’t have to follow one strategy entirely. A hybrid approach can strike a good balance.

Systematic withdrawal strategy from a diversified portfolio

Stock investing is a popular alternative to annuities. A diversified portfolio offers greater liquidity and the potential for growth not found in annuities. Investing in stocks brings more risk, though.

If you follow the 4% rule on a $750,000 example portfolio, you could net $30,000 annually. You could expect a similar amount for roughly 30 years.

Bond ladders for guaranteed income

Bond ladders are a suitable alternative to annuities. You purchase individual bonds with staggered maturities. When one matures, you can reinvest the cash or use the funds for your current needs.

Bond ladders offer predictable liquidity and lower risk, albeit without the longevity protection of annuities. The current rate for a 10-year Treasury is 4.2%. Other bond types may pay more or less.

Step-by-step process for buying an annuity

Buying an annuity is best handled methodically. Here are the steps to follow to purchase an annuity.

Step 1: Determine how much to annuitize

It’s wise to begin with your income gap, which is the difference between your vital monthly expenses and guaranteed income.

That gap is the amount you should target the annuity to handle annually. Your annual income gap times 20 is a good formula to use.

Step 2: Shop multiple insurance carriers

Comparing insurers is critical to finding the right fit for your situation. Get rates from at least three to five companies, and work with an independent broker who represents multiple insurers.

“Get quotes from three different carriers and compare the guaranteed minimum payments side-by-side. That’s the number you care about, not the ‘projected’ returns,” says Croak. If the salesperson uses high-pressure sales tactics, promises minimal risk, or won’t explain fees, it’s best to look elsewhere.

Step 3: Evaluate financial strength ratings

A promise is only as good as the insurer making it. The insurer will likely be making payments for decades. Only consider insurers rated A or higher. And review multiple ratings agencies when making your decision.

Step 4: Complete application and fund the annuity

Review the application with your financial advisor. Make sure you fully understand how the contract works and how you’re funding it.

Expect the entire application process to take several weeks. Don’t overlook asking about the free-look period, either, which is usually 10 to 30 days after signing and allows you to cancel without risk.

Bottom line: Should I buy an annuity?

Purchasing an annuity is an important decision. Annuities are rarely a complete solution, but a part of a holistic strategy. Each situation is different. Only use funds you know you won’t need access to, and consider factors like age, goals, and other income sources before buying an annuity.