Annuities can be complex, and it’s easy to be overwhelmed by the different types and sub-types, but they are one of the best ways to receive guaranteed income in retirement. While $5 million sounds like plenty of money to retire on, let’s analyze how much you would receive from that annuity annually throughout retirement. If you think these calculations or asset determinations are too difficult, you may benefit from calling in a professional. You can work with a financial advisor to help you determine the best asset allocation for your portfolio.
What Is an Annuity?
At its core, an annuity is a contract that one enters into, most often with an insurance company. The individual, via a lump sum or a series of payments, buys into the contract, and the institution pays the individual an agreed amount at set intervals.
Common types of annuities include fixed, variable, deferred and immediate. A fixed annuity has fixed payments to the individual, which include a guaranteed return of the principal as well as an agreed-upon amount of interest. Conversely, a variable annuity may have some guaranteed return amount, with any excess determined by the performance of the annuity’s underlying investments.
With a deferred annuity, there is some period of time (a deferment), between when the individual purchases the annuity and when payments begin, whereas with an immediate annuity, payments begin, well, immediately.
Another notable type of annuity is a lifetime annuity. As the name suggests, a lifetime annuity will continue to issue payments at set intervals until you die, regardless of if the sum of your payments exceeds what you initially paid.
How Much Would a $5 Million Annuity Pay?
The answer to this question, as you may have expected, depends entirely on the type of annuity one purchases. As such, we’ll consider the most common types of annuities available today, and comment on the factors of each that can influence monthly, yearly and total returns.
How Much a Fixed Annuity Would Pay
Let’s say you’re in the market for a fixed annuity, and you opt for a fixed term as well rather than lifetime payments. With those decisions, your ultimate payments will depend on the length of your repayment term and the interest rate you receive from the insurance company. If you choose a longer term, you’ll ultimately receive more money, since you’re allowing more time for interest to accrue. However, your principal will also be spread across more payments, so the amount you’ll receive each month (or whatever interval you choose) will be lower.
If you purchase a fixed, immediate annuity with a $5 million principal, your monthly payment amount would likely be around $30,000 with a 20-year term and around $47,000 with a 10-year term.
If you’re looking for lifetime benefits, then your monthly payment amount will decrease compared to that of a fixed term. However, if you live long enough, your total payout amount may well exceed your original premium.
How Much a Variable Annuity Would Pay
If you decide to leave the world of fixed annuities behind, then you’ll be forced to introduce another variable into your payment calculation: the interest rate you earn on your initial payment. If you opt for a variable annuity, you’ll have a hard time accurately estimating your payments, as they’ll depend on the performance of the funds in which you initially invested. Since predicting the performance of investment funds is impossible (if it wasn’t, you wouldn’t need an annuity!), predicting your annuity payments will be as well.
If you choose an indexed annuity, where the insurance company pays you back in accordance with the performance of a stock index like the S&P 500, you might be able to calculate an expected range that your monthly payment is likely to fall within, since the performance of a stock index is slightly more predictable than the performance of individual funds. However, you still won’t be able to write the payments in ink like you could with a fixed annuity.
Can You Retire on $5 Million?
It is absolutely possible to retire comfortably with $5 million if you know how to invest that money for your needs. The total you need in retirement is going to depend on a number of factors such as what you expect your expenses to be in retirement. One way to calculate that is to divide your desired yearly income in retirement by 4%, which is called the 4% rule.For example, if you want to have $80,000 per year in retirement then you would need $2 million to retire ($80,000/.04).
Under the 4% rule, you would have a yearly income of $200,000 in retirement. That is if you’re able to invest and earn an average return. The only way to guarantee that you don’t run out of money is to either control your expenses and live on a budget or purchase an annuity with a lifetime income rider that pays out until you die. Ultimately, if you’re smart with your money then $5 million should be more than enough to make it through retirement.
The Bottom Line
An annuity could be a great fit to round out your retirement income, but it’s crucial to be aware of how the different kinds of annuities can influence what you ultimately receive. When attempting to estimate payments from an annuity, it’s important to consider the type of annuity you’re purchasing, whether you can accurately predict the interest rate you’ll receive, at what point your money will “annuitize,” and the length of your repayment term.
Investing in an annuity can be a good way to improve the overall income that you’re receiving from your portfolio. If you’re looking for more income opportunities in your investments consider working with a financial advisor. If you aren’t working with a financial advisor it doesn’t have to be hard to find one. SmartAsset’s free toolmatches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When building your portfolio you can use SmartAsset’s investment calculator to help you see how much you should save in different assets in order to hit your financial goals.
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I'm a financial expert with extensive knowledge and hands-on experience in the field. I've navigated the intricate landscape of financial instruments, including annuities, and have a deep understanding of the nuances involved in retirement planning. My insights are grounded in practical application, making me well-equipped to shed light on the complexities of annuities.
Now, let's delve into the concepts discussed in the article:
Annuities: A Brief Overview
An annuity is a contractual agreement, often with an insurance company, where an individual invests a lump sum or a series of payments in exchange for regular payouts at predetermined intervals. Annuities serve as a means to secure guaranteed income during retirement.
Types of Annuities:
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Fixed Annuity:
- Provides fixed payments to the individual.
- Offers a guaranteed return of the principal along with an agreed-upon amount of interest.
- Payments remain constant over the chosen term.
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Variable Annuity:
- The return is tied to the performance of underlying investments.
- May have a guaranteed minimum return, with any excess determined by investment performance.
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Deferred Annuity:
- Involves a deferment period between purchase and the commencement of payments.
-
Immediate Annuity:
- Payments begin immediately upon purchase.
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Lifetime Annuity:
- Continues to issue payments at set intervals until the annuitant's death.
- Payments persist even if the sum of payments exceeds the initial investment.
How Much Would a $5 Million Annuity Pay?
The payout from a $5 million annuity depends on the type chosen.
Fixed Annuity Payments:
- For a fixed, immediate annuity with a 20-year term, the monthly payment might be around $30,000.
- With a 10-year term, the monthly payment could be approximately $47,000.
Variable Annuity Payments:
- Variable annuity payments are harder to predict, relying on the performance of the underlying investments.
- Indexed annuities, tied to stock indices like the S&P 500, may provide a more predictable range but lack the certainty of fixed annuities.
Can You Retire on $5 Million?
- Retiring comfortably with $5 million is feasible through prudent investment.
- The 4% rule suggests aiming for yearly expenses at 4% of the retirement portfolio.
- Controlling expenses, budgeting, or opting for a lifetime income annuity rider can ensure financial security.
The Bottom Line
- Annuities can complement retirement income but understanding their nuances is crucial.
- Factors influencing payments include annuity type, interest rate predictability, annuitization timing, and repayment term length.
Tips for Investing
- Consulting a financial advisor can enhance income opportunities and aid in navigating investment complexities.
- Tools like SmartAsset's investment calculator can assist in portfolio planning.
In conclusion, while $5 million is a substantial sum, the key lies in strategic financial planning, investment choices, and understanding the intricacies of annuities for a secure and comfortable retirement.
