How Much Monthly Income Could You Get From a $50,000 Annuity?
Annuities are investment options that are typically best for older investors. For one thing, there’s a 10% penalty for annuity withdrawals before age 59 ½, making them problematic for younger investors. But the very purpose of most annuities is to provide a lifelong income stream or at least one for a certain period of time. This is attractive to older investors because many of them might otherwise have a real risk of outliving their income.
But one of the problems with annuities is that it can be hard to know exactly what you’ll get out of them if you invest. Here’s a look at the different types of annuities, what you might earn from them if you invest $50,000 and the risks involved in purchasing annuities.
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Types of Annuities
The two main broad categories of annuities are fixed and variable.
All annuities have two phases, dubbed “accumulation” and “annuitization.” During the accumulation phase, an annuity can grow in value due to either additional contributions or its own investment performance. At annuitization, the annuity begins paying out.
Fixed annuities pay a stated interest rate, which they can begin to pay either immediately or after a deferred period of time, during which they accumulate in value. Variable annuities are usually invested in mutual fund-type investments that can rise or fall in value until annuitization. At that point, they pay income based on their accumulated value.
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Types of Annuity Payouts
There are different ways you can take a payout from an annuity. Here are some of the most common:
Life: You’ll receive payments as long as you live.
Joint life: Also known as joint and survivor life, you will receive payments until you pass away, at which point your surviving spouse will receive payments for the rest of their life. These payments are typically smaller than life-only payments since they cover a longer period of time.
Life with period certain: Also known as guaranteed term, this pays for life unless the insured dies before a certain period of time, such as 10 or 15 years. At that point, payments will continue to a beneficiary for the specified period of time.
Fixed period or period certain: Payments will continue only for the specified period, not for the life of the insured.
Lump sum: The entire value of the account will be paid out at one time.
Note that not all insurance companies offer all of these options, but some may offer even more.
Payments You Might Receive From a $50,000 Annuity
A straight fixed annuity is the easiest type of annuity to calculate a payment from. This is because fixed annuities work like bonds. If you use $50,000 to buy a fixed annuity paying 5% per year, for example, you’ll earn $2,500 annually or about $208.33 per month.
Deferred annuities, on the other hand, can be more complicated to estimate payments for because there are so many variables. Whether an annuity is for the life of the account holder, his or her spouse or a shorter term certain of, for example, 10 or 20 years will affect how much the monthly payout you receive is. Even the gender of the insured plays a role, as men will typically receive higher monthly payouts than women simply because they don’t generally live as long.
According to Blueprint Income, average payouts for men aged 60 to 75 investing in a $50,000 annuity can range from $3,519 to $5,019 per year. For women, however, those rates drop to a range of $3,427 to $4,769. These rates are for immediate annuities as of March 2024.
Tax Benefits of Annuities
Unlike if you invest in a bond, the income you receive from an annuity is not fully taxable. During the accumulation period, earnings in an annuity grow tax-deferred. Annuity payouts are a combination of earned income and the return of some of the principal you invested. While the income portion is fully taxable, the return of your principal is tax-free. Any death benefit associated with your annuity contract, if applicable, will be tax-free to your heirs as well.
Risks Involved in Buying Annuities
The main pro involved in buying an annuity is that you can typically convert it to a lifelong, guaranteed income stream. The peace of mind that comes with that can be very important to older investors. However, there are some drawbacks that you should be aware of before you take the plunge.
First, annuities can be expensive. An annuity company may take anywhere from 1% to 3% in annual fees, and most annuities have long surrender periods as well. This means that you might pay as much as 10% if you want to get out of your contract early, and there may be some type of surrender charge for as long as 10 years.
You may not always get the highest return from investing in an annuity either. As insurance companies take customer deposits and use them to buy bonds, the returns they pay out to investors are usually less than you could get from investing directly in a bond yourself.
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This article originally appeared on GOBankingRates.com: How Much Monthly Income Could You Get From a $50,000 Annuity?
