As you plan for retirement, you may set a goal to accumulate a $1 million nest egg. If you put that money into an annuity, you could expect a steady monthly income.
That’s an appealing prospect, especially if you are concerned about running out of money and sustaining your lifestyle throughout retirement.
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 period. An annuity is often used for retirement as it provides a steady income stream for the duration of the contract. Different types of annuities are available; some come with a fixed interest rate, while others have a variable rate. A fixed annuity will provide a set payment amount, and a variable annuity will have payments that fluctuate based on the performance of the investment.
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 several years. Once the payments start, you’ll get a monthly income for the determined period, which could be 20 years, 30 years or a lifetime.
[READ: 9 Jobs That Still Offer Traditional Pensions]
How Much Will a $1 Million Annuity Pay?
Understand what you’ll get in exchange before committing $1 million to an annuity. “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,” said Collen Clark, an attorney and managing partner at Schmidt & Clark LLP in Dallas, in an email. You can use an online calculator such as the Annuity Expert‘s or AARP’s fixed annuity calculator.
For example, say you are 60 years old and purchase a $1 million annuity that begins payments immediately. “The annual payout is approximately $62,000,” said Wilson Coffman, president of Coffman Retirement Group in Huntsville, Alabama, in an email. 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 at 60 and begin payments five years later, “your annual payout will be approximately $90,000 at age 65,” Coffman said. 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.
[READ: How Much You Will Get From Social Security.]
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 had while working. If you are concerned about investments losing money in the stock market, an annuity may provide peace of mind. An annuity can also 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,” said Rich Laing, a wealth advisor and qualified plan advisor at Prime Capital Investment Advisors in Overland Park, Kansas, in an email.
[Related:What Does a $2 Million Annuity Pay Annually?]
Disadvantages of a $1 Million Annuity
While you can expect 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 you may face penalties if you withdraw money early. “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 said.
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 and determine 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 said. This way, some income could continue even after your death.
Taking a big-picture view can help you decide whether to purchase 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 said.
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How Much Does a $1 Million Annuity Pay Annually? originally appeared on usnews.com
Update 10/15/24: This story was published at an earlier date and has been updated with new information.
