How Much Monthly Income Could You Get From a $200,000 Annuity?

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If you’re looking for income in retirement and you have concerns that you might outlive your nest egg, an annuity can be a good option. Depending on the type of annuity you buy, you could tap into an income stream that is guaranteed for your entire lifetime, and perhaps even that of your spouse, as well.

For this and other reasons, including the 10% penalty for annuity withdrawals before age 59 ½, annuities are generally a better choice for older investors. However, it’s true that annuities can be complicated to understand, so it pays to do some research. Here’s a broad look at annuity characteristics and how much you might expect to earn if you invest $200,000.

Types of Annuities

In a general sense, an annuity can either be fixed or variable. Fixed annuities pay a stated interest rate, while variable annuities, as the name suggests, can have variable returns.

All annuities build value during the “accumulation” phase and begin paying out income during the “annuitization” phase. Annuities can accumulate value through investment returns or increased contributions during the first phase. During annuitization, the payout is based on the final accumulation value.

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.

Types of Annuity Payouts

There are various ways that you can get income out of your annuity. Essentially, the differences amount to how long you want to receive a payout. Here are the most common:

• Life: You’ll receive income payouts from your annuity for as long as you live.
• Joint life: Also known as joint and survivor, joint life makes payments for your lifetime and then continues to make payouts to your spouse for the duration of their life, as well. Since these payments can potentially last longer, they are based on your joint life expectancy and are therefore smaller than single life payments.
• Life with period certain: These payouts continue for your entire life, but they also carry a guaranteed term, such as 10 or 15 years. If you die before the end of the term, your payments will continue to a beneficiary until the guarantee expires.
• Fixed period/period certain: These payments last for a specified period of time, rather than over your life expectancy. For example, you might choose to receive payments for 10 or 15 years, after which time they will stop.
• Lump sum: Under this option, your entire account balance is paid out at one time.

Not all insurance companies will offer all of these options, but some may offer additional ones. This is why it pays to shop around for what you want.

Payments You Might Receive From a $200,000 Annuity

A fixed annuity is the type that’s most like a traditional bond. With a fixed annuity, you’ll earn a stated, fixed interest rate that will make you regular payments. For example, if you buy a $200,000 fixed annuity paying 6% per year, you’ll earn $12,000 annually, or $1,000 per month.

Deferred annuities have more complex payment formulas based on variables such as type of payout, life expectancy and the sex of the insured, as women live longer than men, on average.

According to Blueprint Income, the average monthly payouts for men aged 60 to 75 investing in a $200,000 annuity could range from about $14,000 to $20,000 per year — $1,167 to $1,667 per month. For women, however, those rates drop to a range of $13,710 to $19,076, or $1,143 to $1,590 monthly. These rates are for immediate annuities as of March 2024.

Tax Benefits of Annuities

One of the advantages of investing in an annuity instead of a bond is that you can get tax benefits. Most annuities earn tax-deferred income during the accumulation period, and payouts are not fully taxable. This is because annuities pay a combination of principal and interest. The portion of your payment that is the return of principal is non-taxable. Death benefits are also paid out tax-free to heirs.

Risks Involved in Buying Annuities

In spite of their many advantages, there are some drawbacks to buying an annuity.

First, annuities can be expensive. An annuity may cost 1% to 3% in annual fees, and most carry steep surrender charges, as well. If you want to get out of your contract early, you may have to pay up to 10% of the amount of your principal to surrender a policy. While those fees decline over time, they may last as long as 10 years before they are completely gone.

Annuities don’t always earn the best rates of return either, in part because they charge fees. If you simply want to earn the highest income you can, for example, you may be better off simply buying a straight bond instead of an annuity.

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