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How Much Would a $1 Million Annuity Pay?
A $1 million lifetime annuity could pay as much as $6,073 a month for a 65-year-old woman purchasing an immediate annuity. The monthly payout of a $1 million annuity depends on several factors, including when payments start, the length of distribution, and the annuitant’s age and gender.
On the other hand, say you buy that same annuity at age 35. By purchasing the contract further in advance you will lock in a much higher rate of payment. In this case, you could find some institutions that offer you repayments as high as $23,000 per month ($276,000 per year).
What is an annuity?
At its most basic level, an annuity is a contract between you and an insurance company that shifts a portion of risk away from you and onto the company. There are 2 basic types of annuities:
Under ideal circumstances, no one would ever run out of money in retirement, and they’d have enough resources to meet all their essential expenses and more. But with stock market volatility, stubborn inflation, and rising interest rates still in the picture, more people are searching for predictable income strategies to help meet their retirement needs.
Certain types of annuities can offer a boost to retirement savings, whereas others can offer a dependable income stream for people approaching or already in retirement. And like other types of fixed-rate products, such as bonds and certificates of deposit (CDs), higher interest rates mean you can get more income than you may have in the past.
In previous years people may have been more circumspect about investing in annuities, due in part to their reputation for complexity and high fees. Today, there’s a wide range of annuities, some of which are less complex and lower in fees and have a range of features that can help you achieve specific financial goals.
“Annuities can offer guarantees and security. Some annuities also offer flexibility around things like accessing principal or controlling the timing around taking distributions,” “Annuity products have come a long way in recent years, enabling clients to better match a specific annuity to their unique needs and preferences.”
To help simplify things, you can think of purchasing an annuity as existing on a life-stage continuum. When you’re saving for retirement, an annuity can offer market exposure, and growth potential that could complement other parts of your portfolio that are invested more conservatively, such as in CDs and bonds. They can also offer tax deferral as you build your nest egg.
As you begin to approach retirement, you may want some market exposure without taking on too much risk. There are annuities that can reduce market volatility risk, or you may even consider starting to invest in annuities that provide an income stream at a date you set in the future.
Lastly, when you retire, the need to cover your essential expenses can be critical. Annuities that provide regular payments can give you (and your spouse) guaranteed income either for life or a set period of time.
Ultimately, annuities can help manage 3 main retirement risks, namely, market volatility, the possibility you could outlive your savings, and the risk inflation will eat away at your savings.
Income annuities can offer a payout for life or a set period of time in return for a lump-sum investment. They can also be a boost to the conservative part of your portfolio by delivering contractually agreed upon payments in increments that can be monthly, quarterly, or even yearly.
Deferred annuities can allow you to accumulate tax-deferred savings while providing the option to create lifetime income in the future. Deferred annuities provide the opportunity to grow savings tax-deferred, which allows earnings to compound over time. Generally speaking, there are 2 ways to access your assets, each with its own tax implications. You can take withdrawals, which are taxed as gains first and then return of principal once gains are depleted. Or you can convert your savings into income and spread out the tax burden over the payments.
Important to consider: Some deferred annuities impose surrender charges or other penalties for withdrawals within a certain period of time after purchase. In all cases, since an annuity's guarantees are subject to the claims-paying ability of the issuing insurance company, it is important to do your research and choose an annuity issued by a financially strong insurance company.
- Annuities can be both a boost to retirement savings and a dependable source of future income.
- These investments can also help manage market volatility, the possibility you could outlive your savings, and the risk inflation will eat away at your savings in retirement.
- They can help you grow retirement savings, even if you’ve maxed out contributions for the year to qualified plans such as 401(k)s and IRAs, and they aren’t subject to annual IRS contribution limits.
- In retirement, annuities can offer pension-like cash flow, like a paycheck during working years.
How annuities can help savers
Deferred annuities can help you grow retirement savings, once you’ve maxed out contributions for the year to qualified plans such as 401(k)s and IRAs, and they aren’t subject to annual IRS contribution limits.1 Similar to retirement plans, any investment growth is tax-deferred and you won’t owe taxes on an annual basis, but rather when you withdraw, at which time your gains will be taxed at ordinary income tax rates.
Deferred fixed annuities have a fixed rate of return that is guaranteed for a set period of time by the issuing insurance company. In contrast, with deferred variable annuities, the rate of return—and therefore the value of your investment—will go up or down depending on the underlying stock, bond, and money market investment option(s) that you select, allowing you to benefit from any market growth.
Deferred annuities can also help you use a strategy known as the anchor strategy. This strategy uses investments that offer a fixed return over a set period of time, such as CDs or deferred fixed annuities, to protect a portion of your principal. Your remaining assets are then invested in securities such as stock mutual funds or exchange-traded funds (ETFs). The goal is to protect the principal of the conservative part of your portfolio while still retaining growth potential, which can help investors who are concerned about losing money during periods of market volatility.
Growing your savings prior to retirement
Among the annuities to consider if you are years away from retirement, a tax-deferred variable annuity2 can help you grow your savings on a tax-deferred basis by giving you market exposure. A tax-deferred variable annuity has underlying investment options, typically referred to as subaccounts, that are like mutual funds. There are no IRS annual limits to contributions and you choose how you’d like to allocate money among different investments to potentially benefit from market growth. And you can reallocate assets or trade among subaccounts within the annuity tax-free. Additionally, you don’t pay taxes until you receive an income payment or make a withdrawal, at which point earnings, as well as any pre-tax contributions, are taxed as ordinary income.
Tax-deferred variable annuities are typically invested with nonqualified money, or money that does not already have a special tax treatment such as 401(k) or IRA money. An advantage of tax-deferred accounts is that you can defer paying taxes on investment earnings until withdrawn. The power of this deferral can be significant over time because your savings will have an opportunity to compound by realizing earnings on earnings. While you can benefit from a tax-deferred variable annuity’s market exposure, you’ll also pay fees for the annuity.
Good to know: For someone already in retirement, a tax-deferred variable annuity funded with after-tax (nonqualified) money can also serve as a wealth transfer device, as some insurance companies allow the tax savings to extend to a non-spousal beneficiary.
How annuities can help people nearing retirement
As you head into the 5- to 10-year homestretch before retirement, your financial plan will likely begin to change, especially as you consider shifting from saving to spending your nest egg. You may be looking for stable returns, or you may still be seeking growth potential from your savings.
While a deferred fixed annuity (also known as a single premium deferred annuity, or SPDA) is also good for someone living in retirement, if you’re looking for stable returns in the years prior to retirement, a deferred fixed annuity can play a role in the conservative part of your portfolio by providing a fixed rate of return. A deferred fixed annuity guarantees a rate of return over a predetermined time, typically 3 to 10 years, similar to a bank CD which can also offer a fixed rate of return for a set period of time. And just like a CD, if you’re not ready to begin drawing income, you can roll those assets into a new contract with a new guaranteed rate of return. (An important difference is that many CDs are FDIC insured, whereas annuities are subject to the claims-paying ability of the issuing insurance company.) When interest rates increase, as they have over the past 12 months, it tends to drive up the rates offered by deferred fixed annuities and CDs.
It’s important to note that deferred fixed annuities have surrender charges and aren’t intended for people who need access to their assets during the guarantee period. However, deferred fixed annuities can offer some penalty-free liquidity, equivalent to 10% of the contract amount, for unexpected events or to satisfy required minimum distributions from retirement accounts. Taxes are owed on earnings when you start receiving payments.
Similarly, some annuities can guarantee return of your original investment at the end of a minimum holding period while also offering a degree of exposure to the markets. For example, a deferred variable annuity with a guaranteed minimum accumulation benefit (GMAB) can provide market exposure while guaranteeing the return of your initial investment at the end of a defined holding period, which is often 10 years. That’s regardless of market performance, and less the impact of any withdrawals or resetting of the benefit. When you purchase the contract, your principal is fully protected, and your underlying investment has the potential for long-term growth. A GMAB can let you benefit from market gains, but unlike stocks, if the market bottoms out, you get your original principal back in full.3
Keep in mind, however, that the benefit comes with a cost. Investors purchasing a GMAB should be comfortable paying a higher fee in return for the contract's protection.
For people who are just a few years from retirement, a deferred income annuity (DIA) can provide guaranteed income and a steady cash flow for life. DIAs provide a fixed payout—but, as their name implies, the payout is deferred until a predetermined date in the future that you select. Here's what that might look like for a 60-year-old woman, assuming a $100,000 initial investment with $995 of monthly income starting in 10 years (May 2033).
Rates may change daily. A cash refund is a feature that can be purchased with certain fixed income annuity contracts. A contract with a cash refund provides income payments during the lifetime of the annuitant. Upon the annuitant’s death, the beneficiaries receive the difference between the premium and the total payments made while the annuitant was living. Once the total payments made during the lifetime of the annuitant equal the premium, no death benefit is payable.
With a DIA, you may also take advantage of periodic investing to secure income payments in varying interest-rate environments. Each investment you make enables you to lock in income that is added to your final cash flow payment when you are ready to start. Similar to dollar-cost averaging, you may potentially benefit from a range of interest rates.
Annuities for people living in retirement
When you’ve reached retirement you may want the security of having a guaranteed source of income that can help cover your essential expenses, just as a paycheck did while you were working, and income annuities can offer a pension-like stream of income for life.5 Income annuities may even increase an investor's confidence to enjoy retirement more fully, because they offer dependable income that will last for a lifetime. Retirees will be more confident and comfortable spending money knowing they will always have dependable income in the future.
For example, an immediate fixed income annuity, also known as a single premium immediate annuity (SPIA), can provide immediate income in exchange for a lump-sum investment. It can offer a pension-like cash flow, and the guaranteed income isn’t subject to market volatility. Immediate fixed income annuities even have optional features and benefits such as a cost-of-living adjustment (COLA) to help keep pace with inflation and beneficiary protection such as a cash refund.
A cash refund guarantees upon the passing of the last surviving annuitant, the beneficiaries will be refunded any difference between your original principal and the payments received—eliminating the fear that the insurance companies will keep your money.
Immediate fixed income annuities may give investors the ability to share in the longevity benefits of the mortality pool. That means assets from other annuitants are pooled together by the insurance company, and those who live longer receive payments from those with shorter life spans. In other words, you won’t be in danger of running out of money. Instead, the longer you live, the more money you could receive.
And a joint and survivor immediate fixed income annuity may offer a simple, low-maintenance way to sustain a portion of retirement income for a surviving spouse or planning partner—which could be an important benefit in circumstances when the remaining spouse is not comfortable making investment decisions or doesn’t have the capacity to do so.
Good to know: If you purchase an immediate fixed income annuity, you may have limited or no access to the annuity assets.
Finally, you can consider a guaranteed lifetime withdrawal benefit annuity (GLWB). This is an additional feature, called a rider, on either a fixed or variable annuity (based on the underlying investment within the annuity). An annuity with a GLWB provides guaranteed income for life even if the underlying investment account value (meaning the annuity’s) has been depleted.
The variable GLWB annuity allows you to remain invested in the market, but it guarantees income, and that income can increase based on markets, but it will not decrease.6 The longer you defer your income, the larger your payout could be. In addition, you have access to your account value should your circumstances change (surrender charges may apply and the guaranteed income amount will be reduced).
A GLWB annuity can give you more flexibility when you start taking income, including access to the account if your situation changes. That’s a bit different from a single premium income annuity, where you give up control of your money in exchange for a regular, steady lifetime payout.
Gaining peace of mind when retiring
Nobody knows how long they will live in retirement, so it’s critical to save for the time when you stop working, and to have guaranteed lifetime income to make sure your essential expenses are covered. Annuities can help you cover gaps, and they can play an important role as part of a broader retirement income plan to guarantee you’ll have income that you will never outlive. Make sure to consult with a financial advisor before purchasing an annuity, so they can help you understand the pros and cons of the various types of each annuity available to you. (You shouldn’t pay extra for riders or additional features that you simply don’t need.) And then select an annuity that meets a specific financial need as you plan your future.
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.
Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.
With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.
But just how quickly does your money grow? The easiest way to work that out is by using what’s known as the “Rule of 72.”1 Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you’ve invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.
For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.
While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money.
Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value.
The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value.
The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money.
The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost. The Rule of 72 does not include adjustments for income or taxation. It assumes that interest is compounded annually. Actual results will vary.
Bottom line
If you’re looking to double your money in any reasonable time frame, you’ll need to take some risk. You simply won’t be able to earn enough from safe bank products to reach that goal. Above all, it’s important to remember that you don’t have to make the riskiest trades – ones that look more like gambling than investing – to build your fortune. You do have high-return options that can limit (but not eliminate) your risk, such as a house, S&P 500 funds and 401(k) matching.
What Is An Immediate Annuity?
Consumers bought $16 billion of fixed-rate deferred annuities in the first quarter, up 45% from the previous quarter, and a 9% rise from the year-earlier period, according to Limra.
These annuities work like a certificate of deposit offered by a bank. Insurers guarantee a rate of return over a set period, maybe three or five years. At the end of the term, buyers can get their money back, roll it into another annuity or convert their money into an income stream.
Average buyers are in their early to mid-60s — near traditional retirement age and looking to protect their money as they shift out of work.
Each of these products hedge against downside risk to varying degrees. They are tied to a market index like the S&P 500; insurers cap earnings to the upside when the market does well but put a floor on losses if it tanks.
A Single Premium Immediate Annuity (sometimes referred to as an "SPIA") may be the right annuity for you if you are looking for payments that begin right away and continue for the rest of your life or for a specified period of time. The annuity is purchased from an insurance company with a single, lump sum amount called a premium.
When Are Annuities a Good Investment?
Annuities are a good investment for people wanting a reliable income stream during retirement. Annuities are insurance products, not an equity investment with high growth. This makes annuities a good balance to a financial portfolio for someone near or in retirement.
A Guaranteed Income For Life
An annuity may be a good option if you are close to retirement and are looking for a way to guarantee income during retirement. Annuities can provide a stream of income that lasts for the rest of your life, no matter how long you live.
As a result, this can be an excellent way to hedge against the risk of outliving your other retirement savings
Annuities can be a good way to invest your money if you are buying them for reasons that fit with your money goals. You can buy annuities for reasons that include safety, long-term growth, or income. For instance, a fixed annuity might be a good low-risk option instead of a CD that offers low interest rates. You might get a variable annuity for long-term growth that is tax-deferred. You may opt for an annuity that will bring you income in the future.
In each of these cases, the insurer that issues the annuity will guarantee some portion of the outcome. In many cases, they will guarantee the amount of income you can take from the annuity in the future.
How does an immediate annuity work?
In return for your lump sum, the insurance company promises to make regular payments to you (or to a payee you specify) for the chosen length of time – most commonly for the remainder of your life, however long that may be.
In most instances, immediate annuity payments are sent to you starting one month after you buy your annuity. When choosing an immediate annuity, you can choose how frequently you receive payments – often referred to as the “mode".
While annuity buyers typically choose to receive payments monthly, you may choose quarterly or even yearly instead.
In today’s immediate annuity marketplace, there are a number of ways the annuity can be customized to suit your specific life situation and concerns. In exchange for the guarantee of payments, you give up the right to demand the return of your original premium.
Unlike some forms of life insurance or other types of annuities, you are generally unable to revise or cash in the immediate annuity once the 10-day "free look" period has passed.
- You can fund your immediate annuity in a number of ways, including:
- Cash from a maturing Certificate of Deposit (CD)
- Exchanging monies accumulated in a Multi-Year Deferred Annuity account
- Proceeds from the sale of stocks, bonds, a home or a business
- A lump sum distribution from a tax-qualified defined benefit or 401k, or an IRA account.
Why should I consider buying an Immediate Annuity?
What are its advantages to me?
An immediate annuity comes with many important advantages. Here are just a few:
Security — The annuity provides stable lifetime income which can never be outlived or which may be guaranteed for a specified period. This advantage is crucially important to annuitants who may have previously feared outliving their savings.
Simplicity — An annuity is pretty much “get it and forget it.” Once it is set, the only work you are required to do is collect your regular payments. With an immediate annuity, you do not need to watch markets or track interest rates and dividends.
Higher Returns — The interest rates used by insurance companies to calculate immediate annuity income are generally higher than CD or Treasury rates. Since part of the principal is returned with each payment, greater amounts are received than would be provided by interest alone.
Preferred Tax Treatment — An immediate annuity may be a good strategy to defer taxes until later in your retirement when you may be taxed at a lower rate. This differs from other types of annuities for which the tax burden is “front loaded.”
Safety of Principal — Funds are guaranteed by assets of insurer and not subject to the fluctuations of financial markets.
No sales or administrative charges — Immediate annuities do not have annual account management or maintenance charges. 100% of your premium goes towards your monthly income.
How can you customize an immediate annuity?
You may hear a lifetime immediate annuity called by a number of different names, including
- Single Life
- Joint Life
- Life and Period Certain
- Refund" annuity.
Regardless of its name, by ensuring that you will never outlive your income, a life annuity is a powerful retirement planning tool. What’s more, a life only annuity generally offers the highest payout of any lifetime annuity, because it carries the smallest risk for the insurer.
When you shop for an immediate annuity, you will find that one of the key factors in pricing is your age and life expectancy. In a sense, purchasing an immediate annuity is like making a bet with an insurance company about how long you will live. Since the insurer will stop making payments when you die, it is betting that you won't live beyond your life expectancy.
On the other hand, if you live longer than predicted, your return may be far greater than estimated.
Immediate annuity coverage can be increased by including a second person ("Joint and Survivor" annuity), by adding a guaranteed period of time ("Period Certain" annuity), or by guaranteeing that payments will continue at least until the original purchase amount has been paid out ("Refund" annuity).
This added risk to the insurer is likely to reduce monthly payments by about 5% to 15%, depending on the age of the annuitants and the length of the guarantee period.
What about funding my annuity?
Can you explain the difference between qualified and non-qualified funds?
The way your annuity payments are taxed depends upon the source of the funds you use to purchase it.
Qualified Immediate Annuities
When applied to immediate annuities, the term qualified refers to the tax status of the source of funds used for purchasing the annuity. These are premium dollars which until now have "qualified" for IRS exemption from income taxes.
The whole payment received each month from a qualified annuity is taxable as income (since income taxes have not yet been paid on these funds). Qualified annuities may either come from corporate-sponsored retirement plans (such as
Defined Benefit or Defined Contribution Plans), Lump Sum distributions from such retirement plans, or from such individual retirement arrangements as IRAs, SEPs, and Section 403(b) tax-sheltered annuities, or Section 1035 annuity or life insurance exchanges.
Non-qualified Immediate Annuities
Non-qualified immediate annuities are purchased with monies which have not enjoyed any tax-sheltered status and for which taxes have already been paid. A part of each monthly payment is considered a return of previously taxed principal and therefore excluded from taxation.
The amount excluded from taxes is calculated by an Exclusion Ratio, which appears on most annuity quotation sheets. Non-qualified annuities may be purchased by employers for situations such as deferred compensation or supplemental income programs, or by individuals investing their after-tax savings accounts or money market accounts, CD's, proceeds from the sale of a house, business, mutual funds, other investments, or from an inheritance or proceeds from a life insurance settlement.
New options widen appeal of immediate annuities
A common objection to investing in an immediate annuity is the loss of liquidity. The idea of laying out a substantial amount of capital and not being able to access it again, spooks some annuity buyers.
Many insurance companies that issue immediate annuities have come up with a way to assuage this concern. These companies offer a one-time, limited withdrawal or cash advance option. So you can get at some of your principal beyond the scheduled payments to cover emergencies or other issues.
A rider providing a cost of living adjustment ('COLA') is also offered by some companies to take the sting out of rising inflation, a commonly mentioned concern. Annuity buyers can pick from a variety of COLA rates ranging from 1% to 6% per year. A few immediate annuity issuers even peg their payments to the Consumer Price Index ("CPI").
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