How Much Do Annuities Pay?

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Retirement saving has become pretty much automatic. Most workers save money in a 401(k) or an IRA each year. Retirement spending is another story entirely. After you walk out the door on your last day of work, the thought of having to live the rest of your life — which could be 30 years or longer — on social security plus your savings can be daunting.

See Also: 6 Genius Things All Wealthy People Do With Their Money

One option retirees have is an annuity. You make a single payment or a series of payments called premiums. In exchange, the insurance company agrees to provide a series of monthly payments for the rest of your life.

This can be an attractive option for those who like the idea of continuing to collect a “paycheck” that’s guaranteed to continue for as long as they live. But it’s important to understand what annuities are, how they work and how much they pay.

What Are Annuities?

An annuity is a contract made by an insurance company. The person purchasing the annuity, called the annuitant, is buying the company’s promise to provide them with a series of payments at some time in the future, that will last the rest of the annuitant’s life.

Because annuities are sold by insurance companies, they use the same type of actuarial calculations used for life insurance to determine how long the annuitant is likely to live, and therefore how much they should pay out each month.

Note that annuities are complex financial products, with many different options. If you choose to purchase an annuity with the intent of receiving a lifetime of periodic payments, make sure you understand exactly what you’re getting, and the amount of money you can expect to receive back.

Different Kinds of Annuities

Annuities can be classified in several different ways, and there are multiple types in each classification.

Single or Periodic Premium

The payment you make to purchase an annuity is called a premium. You can make one lump sum payment, known as a “single premium” or multiple, periodic premium payments. Since funds are invested when they are deposited in the annuity, a single premium annuity will be worth more, and therefore generate larger payments, than an annuity funded with periodic payments, assuming the payments to the annuitant begin at the same time.

Immediate or Deferred

An immediate annuity begins making periodic payments to the annuitant right away, a month in the case of monthly payments, or a year in the case of annual payments, after the account is funded. An immediate annuity must be funded with a single premium.

A deferred annuity begins paying out some time after the account is funded. This gives the money a chance to earn interest or investment returns.

If everything else is equal, a deferred annuity will pay out more on a monthly basis than an immediate annuity, simply because the money has had a chance to earn interest or market returns.

Fixed or Variable

The money that is paid for an annuity premium is invested to provide returns and increase the value of the annuity contract over time, thereby increasing the amount of money it will pay out.

If you purchase a fixed annuity, your money will be invested at a guaranteed rate of interest. Variable annuities invest in mutual funds and other securities, which can go up or down in value. This means that your annuity contract value can also go up or down.

Some variable annuities include a provision for the impact of market losses on your contract by providing a guaranteed income benefit. This is typically a rider that you pay extra for, so purchasing this feature may increase the expense of your annuity.

Single or Joint Life

You can purchase an annuity just for yourself, or a joint annuity for yourself and your spouse. If you purchase a joint annuity, your payments will be smaller, but they will continue until you both pass away. If you purchase a single-life annuity your payments will be larger, but they will end when you die.

How Much Annuities Pay

With all of these different kinds of annuities, and the options they offer, the answer to the question, ‘How much do annuities pay?’ is not a simple one. Some examples will show how the different options affect the payout.

A $100,000 single-life annuity for a 65-year-old man who wants to begin income payments when he is 70 would provide about $896 per month. By waiting until age 75 to begin taking income, he would get about $1,421 per month.

Starting earlier can make a big difference. If a 45-year-old man has that same $100,000 single-life annuity now, and begins taking payments at age 70, he would get $2,414 per month. Waiting until age 75 would mean that he would receive $3,604 per month.

A joint annuity will pay less because it covers two lives. So, if a couple. Both aged 65, have a $100,000 annuity and begin payments at age 70, they could expect to get about $737 per month. If they wait until age 75 to begin payments, they can expect to receive $1,095 per month.

An immediate annuity will pay less than a deferred annuity because the money doesn’t have a chance to grow before the income starts. A 65-year-old man with a $100,000 immediate annuity would receive about $634 per month. If that were a joint annuity, and both spouses are 65, it would pay about $548 per month.

Other Factors that Can Affect an Annuity Payout Amount

In addition to the factors listed above, there are other things that can affect the amount you will receive each month from your annuity contract.

Fees

Annuities, particularly variable annuities, have higher fees than many investments, and these can impact your payout. Annuities charge a mortality and expense charge, usually about 1.25% of your account value per year, which compensates the carrier for the risk they assume. This risk consists of the likelihood that you will live longer than the actuarial tables would indicate, and the company ends up having to pay you more in income than they expected. The charge may also cover the commission the company pays to the financial professional who sold you the annuity.

Market Performance

Variable annuities invest in securities, which can go up or down in value. Historically, securities have risen in value over time, but there have been periods of time when these investments have fallen significantly in value. So the amount you will collect in income from your variable annuity can change depending on the condition of the market when you begin taking payments.

Fixed annuities have a guaranteed rate of interest, but that rate can also change. For example, when you purchase a fixed annuity, it may have a guaranteed interest rate of 3%, for example, for the first three years. After that, the rate will adjust based on then-current interest rates. There is usually a minimum below which the guaranteed rate will never fall, but it can be as low as 1% or less.

Annuities are complex investments with a variety of options. Chosen carefully, an annuity can provide you with retirement income that you cannot outlive. A financial professional can help you choose the best annuity for your financial goals.

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