As you plan for retirement, you may aim to accumulate a nest egg of $1 million. If you choose to put your money into an annuity, you could expect to receive payments during your retirement. A $1 million annuity comes with guarantees such as steady income every month. This could be appealing, especially if you are concerned about sustaining your lifestyle and running out of money in retirement.
For an annuity, you’ll pay either a lump sum or a series of payments, and this could be for $1 million. In exchange, you’ll receive payouts from the contract over a set schedule. The amount of those deposits will depend on several factors, including your age when you get the contract, the return rate and the length of time until you begin receiving payments.
Before you choose an annuity, you’ll want to understand:
— How an annuity works.
— How much a $1 million annuity will pay.
— Advantages of a $1 million annuity.
— Disadvantages of a $1 million annuity.
— What to consider before getting a $1 million annuity.
How a $1 Million Annuity Works
An annuity is an insurance product that offers a series of payments over a set time period. An annuity is often used for retirement as it provides a steady income stream for the duration of the contract. There are different types of annuities available, and some come with a fixed interest rate while others have a variable rate. “A fixed annuity offers a predictable payment amount, while a variable annuity’s payments can fluctuate based on investment performance,” says Collen Clark, an attorney and founder of Schmidt & Clark LLP in Dallas. “A variable annuity’s payments can fluctuate based on investment performance.”
For a $1 million annuity, you would pay $1 million as a starting principal. This could be done as a lump sum or through a series of payments over a number of years. Once the payments start, you’ll get a monthly income for the determined time period, which could be 20 years, 30 years or a lifetime.
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How Much Will a $1 Million Annuity Pay?
Before committing $1 million to an annuity, it can be helpful to get an overview of what you will get in exchange. “The amount you receive annually from a $1 million annuity will depend on various factors, including the type of annuity, your age, the annuity’s interest rate and the payout option chosen,” Clark says. You can use an online calculator such as the Annuity Expert‘s or AARP’s fixed annuity calculator.
Using an example can provide a ballpark figure to help you estimate. Say you are 60 years old and get a $1 million annuity that begins payments immediately. “The annual payout is approximately $62,000,” says Wilson Coffman, president of Coffman Retirement Group in Huntsville, Alabama. That comes to about $5,167 per month.
Waiting to take payments could increase the amount you receive every month from a $1 million annuity. For instance, if you sign a contract when you are 60 years old and begin payments five years later, “your annual payout will be approximately $90,000 at age 65,” Coffman says. You could expect to get $7,500 each month. That amount is $2,333 more than what you would get if you began the annuity payments immediately at age 60.
[Related:Can I Retire at 50 With $2 Million?]
Advantages of a $1 Million Annuity
One of the main benefits of a $1 million annuity is that it can replace the income stream you have while working. If you are concerned about investments receiving a negative return, such as losing money in the stock market, this option could provide peace of mind. It also might help you set a long-term budget for your retirement years
You may choose to have a $1 million annuity as part of your overall retirement plan to create diversification and balance. “Annuities can be designed to fit your unique goals, whether you simply want to protect from downside risk, maximize lifetime income or even protect a portion of your portfolio for a shorter duration,” says Rich Laing, a wealth advisor and qualified plan advisor at Prime Capital Investment Advisors in Overland Park, Kansas.
Disadvantages of a $1 Million Annuity
While you can expect to receive steady payouts, you’ll also want to evaluate how your funds will be used. An annuity will typically keep your money in a set place for a certain length of time. There could be maintenance fees, and if you withdraw money early, you could face penalties. “Inflation can erode the purchasing power of fixed payments, and annuities might not be the best investment choice for individuals seeking higher growth potential,” Clark says.
[READ: How to Save $1 Million by Retirement]
What to Consider Before Getting a $1 Million Annuity
You’ll want to estimate how much income you’ll need in retirement before getting a $1 million annuity. Look at your other income sources, such as how much you’ll receive from Social Security and retirement accounts. Think about your family members as well. “One major factor to consider is adding your spouse to the annuity,” Coffman says. This way, some income could continue even after your death.
Taking a big-picture view can help you make decisions about whether to get a $1 million annuity contract. “While annuities can offer financial security and a reliable income stream, it’s important to carefully consider your financial goals, risk tolerance and other investment options before committing to an annuity,” Clark says.
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How Much Does a $1 Million Annuity Pay Annually? originally appeared on usnews.com
