How Much Would a $1.5 Million Annuity Pay?

If you had $1.5 million to invest for retirement income, how much could it realistically pay you each year? For many retirees, turning a large lump sum into a predictable paycheck is an appealing way to reduce uncertainty and protect against outliving their savings. But annuity payouts aren’t one-size-fits-all, they vary based on age, interest rates and the features you choose.

A financial advisor could help you assess whether an annuity is a good fit for your retirement plan.

What Is an Annuity?

An annuity is a financial contract between you and an insurance company designed to provide a stream of income, typically during retirement. In exchange for a lump sum payment, such as $1.5 million, or a series of contributions, the insurer agrees to make regular payments to you either immediately or at a future date. The structure and guarantees depend on the type of annuity you choose.

With an immediate annuity, payments usually begin shortly after you invest your money, often within a year. A deferred annuity, on the other hand, allows your investment to grow tax-deferred for a period before income payments start later. The timing of when you begin receiving payments can significantly affect how much a $1.5 million annuity ultimately pays out.

Annuities come in several varieties. Fixed annuities offer predictable, guaranteed payments based on interest rates at the time of purchase. Variable annuities tie returns to underlying investments, which means payments can fluctuate. Indexed annuities fall somewhere in between, offering returns linked to a market index with certain caps or participation limits.

One of the main appeals of an annuity is the option to receive income for life. A lifetime annuity can provide guaranteed payments regardless of how long you live, helping reduce the risk of outliving your savings. However, adding features like survivor benefits or cost-of-living adjustments may lower your initial payment amount.

What Does an Annuity Pay?

SmartAsset: How Much Would a $1.5 Million Annuity Pay?

The payout from a $1.5 million annuity can look attractive on paper, especially if you’re seeking predictable retirement income. But the exact amount you’ll receive depends on several variables, including your age, interest rates and the specific contract features you select. Understanding how insurers calculate payments can help you set realistic expectations before committing a significant portion of your savings.

Stating a single average for annuity payments is difficult because rates vary based on several factors, including:

Lump sum vs. structured payments: Annuities typically pay more when purchased with a single lump sum compared to a series of payments.
Date of purchase: The further in advance you purchase your annuity, generally the higher your return.
Amount of payment: Annuities tend to have a higher rate of return when you spend more on them.
Lifetime vs. fixed period: Fixed-period annuities tend to have different rates of return compared with lifetime annuities because these are guaranteed products, while lifetime annuities are speculative based on how long your retirement lasts.
Annuity provider: Finally, different companies will offer you different products. The exact return that you can receive depends entirely on who you buy your annuity from and what they’re willing to offer, because there is no one set of rates that everyone adheres to.

Even within these categories there is more detail because annuities can have three different structures for their returns: fixed rate, variable and indexed.

A fixed-interest annuity is one in which the return rate is set in advance. The company agrees to pay a set amount over a defined time frame. A variable annuity’s returns depend on external factors, such as market performance and the investment portfolio selected. The company specifies what the annuity’s return will be based on, and then makes payments depending on those outside factors.

Finally, an indexed annuity is one in which the annuity’s return is pegged to some third-party index like the S&P 500. The company specifies what index your return will be based on and then makes payments as appropriate. The result is that it’s extremely difficult to calculate a clear, average rate for annuity payments.

However, there is some data out there. Term certain annuities with a fixed rate of payment are the easiest to assess because these have specific numbers involved. With those products, studies have found that they currently offer rates of return ranging between 1% and 5.5%, with the average coming in around 3.2%. But you should take even those numbers with a grain of salt, since they will change based on factors ranging from how long your contract lasts to when you buy it.

How Much Does a $1.5 Million Annuity Pay?

For most people saving for retirement, this is the critical question. They want to know how much this product will pay them once they retire so they can add that to their financial planning. And the good news is that you can, indeed, know that figure. It depends on the details of the product that you plan on buying, but when you look at investing in a specific annuity you will see the exact monthly rate that you will get for any given set of circumstances.

For example, say you buy an annuity for $1.5 million from Schwab with the following details:

Payment: Lump sum up front
Age at purchase: 65
When payments begin: Immediately
Structure: Single life only
Return: Fixed return

With a single life only annuity, you pay the whole price up front and you buy a retirement product that will make regular monthly payments for the rest of your life. Based on those factors, an immediate annuity would pay you $9,755 per month for the rest of your life. If you die five years into the contract, however, your beneficiaries don’t collect anything.

To protect against the risk of dying early and not recouping your initial investment, you could purchase a period certain annuity.

Payment: Lump sum up front
Age at purchase: 65
When payments begin: Immediately
Structure: Single life with 20-year period certain
Return: Fixed return

With a single life 20-year period certain annuity, you would immediately collect $8,736 per month for the rest of your life, according to Schwab’s estimates. However, if you die within the first 20 years of the contract, your beneficiaries receive the remaining payments. For example, if you died 10 years after the annuity started paying out, your beneficiaries would collect payments for 10 more years.

But what if you still have years or even decades before you need the money? For example, say that you’re currently 45 years old and want your annuity payments to start at age 65. In this case, you could buy a deferred annuity. Investing $1.5 million in deferred annuity may look like this, according to Schwab:

Payment: Lump sum up front
Age at purchase: 45
When payments begin: 20 years
Structure: Single life
Return: Fixed return

Twenty years after buying the deferred annuity, you would receive nearly $27,000 per month for the rest of your life.

Bottom Line

A $1.5 million annuity can provide a substantial and predictable stream of retirement income, but the exact payout depends on your age, interest rates, payout structure and optional features. While lifetime guarantees can offer peace of mind, they often come with trade-offs in flexibility and liquidity. Understanding how different annuity types work, and how payments are taxed, is essential before committing a large sum.

Tips for Retirement Savers

A financial advisor help you create a financial plan for your retirement savings goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Annuities have their upsides, most importantly the certainty they can offer for retirement savers. But critics suggest that they can cost you far more than if you had spent the same amount of time invested in a simple index fund. Learn here about the pros and cons.