How Much Income Can You Really Get from an Annuity?

Once you’ve done the hard work saving for retirement, the next step is to take the funds you have accumulated from IRAs, 401(k)s, and brokerage accounts and turn them into an income so that you can pay your living expenses, as well as non-essentials like entertainment and fun. When you take a sum of money and invest it into an annuity contract, you’re basically getting a goose that lays golden eggs (with the “goose” being income annuities). An annuity can turn a sum of money into paychecks that keep on coming, no matter how long you live, for one life or two. But there are different types of annuities. So, how do you know which annuity is the right choice for you? How much should you invest? And how much of an income will you really get? The first step is to clarify your short- and long-term financial objectives, as well as your risk tolerance. This will help you with your investment options, as well as the right annuity. You should also estimate how much retirement income you may generate from other sources, such as Social Security. An annuity can then provide you with some added tax-advantaged growth and income flexibility. But all that glitters isn’t gold – and there are some risks to consider with annuities. For instance, a lot of financial professionals focus on the rate of return or the bells and whistles of an annuity instead of on the income it may provide. Here is a peek at some real numbers that income annuities could produce.

Income from Immediate Annuities

Immediate annuities can function much like traditional pensions: in exchange for a lump sum of money, or a single premium payment, (such as personal funds or a rollover of your retirement savings), these contracts give the investor a guaranteed income for life. Pros: As the name of the annuity suggests, the guaranteed income begins right away. These are some of the simplest income vehicles around in that you don’t need to worry about income features, fees, or guaranteed lifetime benefit riders. You invest the money and the income starts. Cons: Immediate annuities are said to annuitize the money. This means once you enter into the contract, you no longer have access to this money as a lump sum. If you elect a “life only” immediate annuity, any payments leftover in the contract will revert back to the insurance company and not to your family or spouse. Most immediate income annuities do offer beneficiary options but these elections typically result in a slightly lower income.

What does the guaranteed lifetime income from an annuity look like?

According to Barron’s 50 Best annuities for 2017, a 70-year old male who puts $200,000 into an immediate annuity that is “life only” may receive an annual income for life that pays out $1,297 to $1,247 a month. If he happens to live until age 90, then his $200,000 contribution will have paid out a total income of about $300,000.

Income from Deferred Annuities

Deferred annuities can take that same $200,000 lump sum and turn it into a stream of future income, but it also offers the added feature of growing your money first for a period of time during the accumulation period. How the annuity grows that money will give you a clue as to what kind of annuity it is. For example, a variable annuity will grow your money with equities, typically mutual funds that may lose money (which is why they require you to receive a prospectus before purchasing one); an indexed annuity invests in a market index that tracks the performance of a certain group of stocks representing a market segment. With these plans, even if the underlying index performs poorly, there will be no decrease in the value of the annuity contract. In any case, though, the tax-deferred growth can often increase exponentially over time. Protecting a portion of your funds from market volatility before you need the income to start can be useful for income planning and may result in a higher lifetime income. You might also choose to delay your annuity payments longer than 10 years. For example, if you or your spouse are concerned about healthcare expenses and longevity runs in your family, you may want to invest in an annuity that doesn’t begin income payments until you turn 80. This can result in a higher monthly income for the same initial investment, and the payment can be set to cover both spouses. Pros: Deferred annuities typically use income riders in order to guarantee the income payments, which means you don’t have to annuitize the stream, so you may still have access to your money. The biggest benefit of the deferred annuity, however, is that any remaining principal left in the contract upon death may be paid out to your heirs. Cons: Deferred annuities can be more complex and expensive than immediate annuities. One type of deferred annuity, the variable kind, charges multiple fees for guaranteed income, because your nest egg remains exposed to the stock market. Other types of deferred annuities such as the fixed indexed annuity offer rates that are capped in exchange for protection from market lows.

What does the income look like?

According to Barron’s 50 Best annuities for 2017, a 60-year old male who puts $200,000 into a deferred annuity may receive a monthly income beginning at age 70 that pays out $1,751 to $1,742 a month. If he happens to live until age 90, then his $200,000 investment will have paid out a total income of just over $400,000.

Income at age 80.

The 60-year old man who invests that same $200,000 and waits until age 80 may receive an income of $4,277 to $3,907 a month. If he lives until age 90, then his $200,000 contribution will have paid out somewhere in the neighborhood of $500,000. How much income you get depends on your age when the contract is annuitized, as well as the amount of your deposit, and the methods used for calculating your income payments. The guarantees you receive are also only as strong as the insurance company that gives it, so you want to investigate the rating of a company first before you buy. You’ll also want to determine how much income tax you may owe on the payouts from income annuities. In some cases, funds that are accessed from income annuities are 100% taxable at your ordinary income tax rate, and in other instances, only a portion of the payout is taxed as ordinary income at your then-current rate. Keep in mind that if you opt to withdraw your funds as a single lump-sum payment, some or all of those dollars will be taxed in the year it is received. The numbers here do not represent all annuities, so be sure to ask your financial advisor, “How much income will I get?” It can be helpful to compare and contrast the benefit and payment terms of similar annuities offered by different companies. Independent advisors can perform this type of annuity testing for you because they are not loyal to one particular insurance company; they work for you, the investor. They can also help you understand other annuity features, such as the death benefit and/or inflation protection, as well as optional benefits that may be added. If you have an annuity you want to test, or you have a question about which annuity can pay out the highest income for you, fill out our simple form and one of our advisors will be happy to get back to you, no fees, no strings, just the facts.

Wondering if an Annuity is Right for You? Or, Are There Other Conservative Investment Strategies that Might Work Better?

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