How Much Does a $500,000 Annuity Pay Per Month?
An annuity is a complex investment product, and there are almost as many opinions on annuities as there are types of annuities — and that’s a lot! While the amount of monthly income you could get from a $500,000 annuity is important to know, it’s also critical to understand annuities and how they work.
See Also: 6 Genius Things All Wealthy People Do With Their Money
What Is an Annuity?
An annuity is a contract between an individual and an insurance company. The individual pays the insurance company a premium, either as a lump sum or in a series of periodic payments. In exchange, the insurance company agrees to pay the individual either a series of periodic payments or a lump sum payment at a future time.
The period of time before you begin taking payments is the accumulation phase. This includes the time you are making premium payments — whether this is one lump sum payment or a series of periodic payments – and the time when your money is invested to earn more money.
The period of time during which you receive periodic payments from the annuity contract is the payout phase. You’ll sometimes hear this referred to as receiving a “stream of income.”
Why Do People Buy Annuities?
One of the advantages of annuities, and a reason many people buy them, is that they can provide lifetime income, no matter how long you live. Once you begin taking payments from your annuity, the insurance company guarantees that you will receive that amount (or sometimes more) every month or year for the rest of your life, even if the total amount of the payments you receive exceeds the amount you invested plus the interest or earnings.
Are All Annuities the Same?
There are many different kinds of annuities. Here are some of the ways annuities are categorized.
Single and Periodic Premiums
There are single-premium annuities, for which you pay one lump sum. Or, you can make periodic payments, making a payment every month or every year for a period of time.
Investors who are buying an annuity for retirement income may roll over their 401(k), for example, into a single-premium annuity when they retire, and then take monthly payments from it.
Investors who don’t have a 401(k) plan could make contributions, or premium payments, to an annuity while they are working, and then take periodic payments when they retire.
In these cases, the annuity acts like a personal pension, as the investor will get payments for the rest of their life.
Immediate and Deferred Annuities
An immediate annuity begins paying out right away and is funded with a single premium payment.
A deferred annuity may be funded with a single premium or periodic premium payments, any payments begin at a later date. The payments accrue interest or gains before the payout period begins.
Fixed, Variable and Indexed Annuities
The money that is used to purchase an annuity contract is invested, and annuities are often categorized by the type of investment that is used. A fixed annuity invests in a fixed investment, with a guaranteed annuity rate of interest. The money in a variable annuity is invested in stocks, mutual funds and other investments that may go up or down in value. Indexed annuities invest in indexed investments, such as index mutual funds or ETFs.
Every annuity will fall into one of each of these categories. For example, you could have a single-premium, immediate, fixed annuity. Or you could have a periodic premium, deferred, variable annuity. The exception is that you cannot have a periodic premium immediate annuity, since an immediate annuity begins paying out right away.
How Do Annuities Work?
Annuities have two phases: the accumulation phase and the payout phase. The accumulation phase is when you deposit money into the annuity. This can be a one-time event, if your annuity is a single-premium annuity, or it can be a series of periodic deposits.
The payout phase begins when the annuity starts paying you money. If you purchased an immediate annuity, the payout phase begins the first month or year you own the annuity, depending on how frequently your payments will come. If you purchased a deferred annuity, your payments will begin when you request them. Some deferred annuities have an age by which you must begin taking payments — typically at age 95 or 100.
Once you have annuitized the contract, which is insurance-speak for taking a stream of income from your annuity, you will receive payment for the rest of your life – or for the rest of both spouses’ lives, if the annuity is a joint contract. Even if the insurance company pays out the entire contract balance, including any earnings, if you’re still living, they’ll keep paying.
The reverse is also true. If you annuitize your contract and begin taking payments, those payments will usually stop when you die, or when you and your spouse both die, in the case of a joint contract. Some annuities have a death benefit provision, so your heirs would get the remaining contract balance that was not yet paid out, but not all. Be sure to understand what type of annuity contract you’re buying.
How Much Does a $500,000 Annuity Pay Per Month?
As you can see, there are a lot of different options for annuities, and the payout amount will vary depending on which option you choose.
These are the factors that will determine how much a $500,000 annuity will pay out per month.
When You Purchased the Annuity
When you purchase an annuity, you can make one or more premium payments. If you make a single payment, the payout amount will depend on how long you wait after purchasing the contract before you begin taking income from it.
For example, if you purchase an immediate annuity, and begin taking income right away, you will receive less money per month than if you purchased your annuity at, for example, age 35, and didn’t start taking income until age 70. The reason is simple: if you wait to take income, your money has had a chance to grow so you’re taking periodic payments from a larger amount.
The same is true of an annuity for which you make periodic premium payments. The longer you make the payments, and the longer you wait before taking income, the larger your income payments will be.
Your Age When You Start Taking Payments
The longer your wait before taking income from your annuity, the larger your payments will be. Don’t wait too long, however – most annuities pay for life, so if you wait until age 80, for example, to begin the income stream, and then you die at age 85, you may not get back all the money you’ve invested.
Whether the Annuity Is Single or Joint
When you purchase an annuity contract, it can be in one name or it can be joint, in the case of a married couple. The payout amount for a joint annuity is usually less than for a single person, simply because the joint annuity continues to pay as long as one of the owners is living.
How Much a $500,000 Annuity Could Pay Per Month
Here are some examples of how much a $500,000 annuity could pay out.
If you are a 60-year-old woman who invested $500,000 in April 2024 in a deferred annuity, in April 2044 you could expect income of $14,749 per month. You would receive this income each month for the rest of your life but when you die, your heirs get nothing.
You could also choose a 20-year certain payout. This means that your annuity payments will continue for your lifetime or for 20 years, whichever comes last. If you die before collecting 20 years’ of payments, your heirs would receive the remaining monthly payments. In this scenario, you would expect monthly income of $9,475.
If the same 60-year-old woman were to invest $500,000 today and begin taking payments right away (i.e., an immediate annuity), she could expect to receive monthly income of $2,793.
Annuities are a complex financial product and it’s important to understand how they work. A qualified financial professional can help you understand if an annuity is right for you.
FAQ
How much does a $1 million annuity pay?
The payout amount of any annuity varies based on several factors. These include whether the annuity is deferred or immediate; fixed or variable; and single or joint. It can also vary based on when you purchase the annuity and when you begin taking payments, as well as your age when the payments start.
Do annuities really pay out forever?
Yes, most annuities will pay you every month (or every year) once you start receiving payments, Remember, though, that most annuities also stop paying when you die. So if you begin taking payments from an annuity and you die a year later, your heirs will probably not receive any money, even if you only collected a small fraction of the amount of money you invested.
This article originally appeared on GOBankingRates.com: How Much Does a $500,000 Annuity Pay Per Month?
