If you’re looking for alternative ways, outside of the stock market and bonds, to create retirement income, an annuity could be right for you. Whether you’re nearing retirement age or have decades to go, a $500,000 annuity can provide consistent, reliable retirement income that forms part of your financial foundation for the rest of your life. Before making an investment decision, you may want to first speak to a financial advisor who can help create a financial plan that meets your unique goals.
What Is an Annuity?
An annuity is an insurance contract that provides monthly payments for a certain length of time, the rest of your life or both. Individuals or couples typically purchase annuities to generate income during retirement.
Unlike an IRA or 401(k), annuities provide guaranteed revenue according to a contract. When you pay into an annuity, you will receive your money plus accrued interest back over time.
Creating sufficient retirement income can be challenging. To address this problem, annuity payments can supplement distributions from an IRA or 401(k). Additionally, your annuity income can help you delay Social Security payments, allowing you to increase your monthly benefit.
There are three types of annuities:
- Fixed annuities have a permanent interest rate, as the name implies. It will pay out over time according to this set rate.
- Variable annuities invest the funds in the account in a higher risk, higher reward fashion. Your return rate and payout rise and fall according to the annuity’s portfolio.
- Indexed annuities have rates of return based on a market index such as the S&P 500. While they invest more aggressively than fixed annuities, they are often less risky than variable annuities.
Remember, the goal of an annuity is to provide steady payments for a long time or for life. Therefore, the annuity you set up needs to generate an amount specific to your lifestyle.
Annuities give two different payout options: immediate and deferred. An immediate annuity will send you monthly payments as soon as you purchase one. If you have more time to plan for retirement, a deferred annuity grows through the deposits you make and the interest it earns over time.
How Much Do Annuities Pay Out?
Annuity payout depends on the value of the annuity, annuity type, the company you choose and your age. You can also guarantee that you receive payments even if your annuity runs out of money through an income rider.
What you receive from your annuity will vary based on the annuity, the company and how old you are when you start receiving payments. However, with a figure of $500,000, you can calculate how much you would receive per year from your annuity.
How Much Does a $500,000 Annuity Pay Per Month?
Annuity payment amounts depend on myriad factors, including whether payouts are fixed or indexed, the interest rate, how old you are when you purchase it and how many years elapse before you start receiving payments. The table below estimates your payouts if you purchase an annuity with a rate of 3% rate at age 55 and start receiving payments immediately. Keep in mind that this is only one example; given the vast array of riders, terms and conditions, payments from other $500,000 will vary.
Example of Immediate Payouts for $500,000 Annuity By Age
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Watch Out for Annuity Fees
All annuities have fees, so make sure you know the details before committing to one. An annuity that yields high returns might also have higher fees than expected. Annuity fees can come in the following forms:
- Administrative fees
- Mortality and expense risk fees
- Early withdrawal charges and tax penalties
- Annual contract fees
- Broker commissions and investment management fees
These costs impact your monthly payout. When looking to purchase an annuity, review all the details in the contract to ensure you understand the conditions, especially the amount you’ll receive.
Should I Buy a $500,000 Annuity?
A $500,000 annuity could be useful to your retirement plan, especially if you are already maxing out your investment accounts. Here is a list of pros and cons to help you determine if an annuity should be part of your retirement strategy.
- Annuities can give you income for life, no matter how the stock market performs.
- Annuities grow tax-free.
- Monthly payments can help you defer Social Security payments for a few years, maximizing your Social Security benefit down the road.
- Payouts can start immediately after purchase.
- Some annuities will continue to pay out even after the fund runs out.
- Fees can be excessive and vague.
- Require large sums of money to secure.
- Depending on how old you are when you make the purchase, you may have to wait years before taking advantage of the benefit.
- Annuity payments are subject to income tax.
Annuities offer the advantage of income uninterrupted by market volatility. Monthly payments can start the day you retire and last for life. However, high fees and low rates of return can inhibit the ability of the fund to give you sufficient income. Depending on your financial situation, a $500,000 annuity could be a lynchpin in your retirement strategy and is worth exploring. Talk to a financial advisor today if you’re thinking about purchasing an annuity.
- Consider talking to a financial advisor about whether an annuity should be a part of your retirement planning and, if so, what type. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
- Consider how annuity income will be treated for tax purposes when you begin receiving payments. Whether you’re purchasing a non-qualified annuity or a qualified annuity determines your tax liability.
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