How Much Would a $1 Million Annuity Pay?

The amount you collect from an annuity depends on several factors. When you start to pay for the insurance product, the interest rate of your annuity, its duration and the details of your particular contract all dictate how much your payments will be. As a result, it’s difficult to provide a specific answer to what any single person should expect from this financial product. However, a 60-year-old who purchases a $1 million annuity at the time of writing that begins paying out five years later could expect to receive monthly payments of $4,450 for 25 years.

You may want to consult with a financial advisor to determine if an annuity is a good fit for your retirement plan.

What Is an Annuity?

Annuities are contracts that you make with a financial institution or an insurance company where you agree to purchase the contract and its terms in either a lump-sum payment or a series of payments.

In exchange, you receive a series of payments made each month for at least one year. While some annuities pay you for a fixed number of years, such as 10 or 20 years, others are what’s called a “lifetime annuity.” The latter is an annuity that pays you during retirement and continues paying each month for the rest of your life.

The idea here is similar to the interest payments you receive from a bank. The company that issues your annuity holds, uses and invests your money. In exchange, it gives you a rate of return and guaranteed payments.

For annuities that pay out over a fixed term (instead of lifetime annuities), this is specifically structured like a loan. You receive back your full initial payment (the principal) plus the interest that accrues over the lifetime of the contract, typically compounded annually.

How an Annuity Works

To get a better idea of how a specific annuity works, let’s look at an example of a $1 million annuity. Your annuity purchase would look like this:

Purchase Price: $1 million
Starting Age: 65
Duration: 25 years

In this case, you would buy the annuity for a single payment of $1 million. In exchange, the insurance company would start issuing you payments at age 65 and continue issuing payments each month for the next 25 years.

Retail investors’ annuities are primarily retirement products, so most of them are structured to start repaying you at or around retirement age. Most people who use this product to save for retirement buy lifetime annuities since these provide guaranteed income throughout retirement.

Every annuity will offer rates of return that differ based on companies and their products. In particular, companies calculate lifetime annuities and fixed-term annuities very differently. Lifetime annuities work differently because the company doesn’t know how long it will make payments, so the value of the annuity is based on interest rates and life expectancy.

How Much Would a $1 Million Annuity Pay?

If you buy a $1 million annuity, you will receive guaranteed monthly payments for the rest of your life or over a set period. How much you receive and for how long depends entirely on the individual contract you buy, when you buy it and from whom you buy it.

For example, imagine you’re 60 years old, plan to retire at 65 and decide to use $1 million in retirement savings to buy an annuity that you’d like to generate monthly income for 25 years. Then let’s say you opt for a multi-year guaranteed annuity (MYGA) that grows at a fixed rate for five years. According to Annuity.org, the highest rate for a five-year MYGA in mid-December 2024 was 5.95%.

So then, your $1 million balance would begin compounding at 5.95% per year for the next five years, a period known as an annuity’s accumulation phase. By the time you reach age 65, the annuity would have a value of just over $1.33 million, allowing you to begin taking payments of $4,450 per month.

Common Types of Annuities

Several different types of annuities vary based on when you pay for the annuity, when you receive payments or even who is making the payments on the annuity. Let’s take a look at the most common, or well-known, types of annuities:

Lump-Sum Annuity: You purchase your annuity with a single payment upfront.
Regular Payment Annuity: You purchase your annuity with regular payments over time.
Period Certain Annuity: Otherwise known as a fixed-term annuity. You receive fixed payments for a defined period.
Variable Annuity: You receive variable payments for either a defined period or for the rest of your life. The payments are determined by your contracts, such as a variable interest rate or an indexed payment system.
Single Life Annuity: You receive fixed payments for the rest of your life.
Joint/Survivor Annuity: You receive fixed payments for the rest of your life. After you die, a named partner continues to receive fixed payments for the rest of their life (although this second set of payments may be a different amount than the first).
Qualified Employee Annuity: You receive payments through an annuity purchased by your employer.
Tax-Sheltered Annuity: You receive payments through an annuity purchased by your employer if your employer is a tax-exempt organization.

Pros and Cons of Annuities

Annuities are financial products that can provide a steady income stream, often used for retirement planning. They come with a variety of benefits and drawbacks that potential investors should consider. Understanding the pros and cons of annuities can help you make informed decisions about whether they fit into your financial strategy.

Guaranteed income stream: Annuities offer the advantage of a predictable income stream, which can be particularly beneficial during retirement. This feature provides financial security by ensuring you have a steady flow of money, regardless of market fluctuations.
Tax-deferred growth: The earnings on annuities grow tax-deferred, meaning you won’t pay taxes on the income until you withdraw it. This can be advantageous for those looking to maximize their investment growth over time without immediate tax implications.
Protection against longevity risk: Annuities can protect against the risk of outliving your savings by providing lifetime income options. This feature is especially appealing for individuals concerned about maintaining their standard of living in later years.
High fees and expenses: One of the significant drawbacks of annuities is the potential for high fees and expenses, which can erode your investment returns. It’s crucial to understand all associated costs, including administrative fees, mortality and expense risk charges, and surrender charges.
Limited liquidity: Annuities often come with restrictions on accessing your funds, which can limit your financial flexibility. Early withdrawals may incur penalties, making it essential to consider your liquidity needs before investing.
Complexity and lack of transparency: Annuities can be complex financial products with terms that are difficult to understand. This complexity can lead to confusion and misinterpretation, so it’s important to thoroughly review and comprehend the contract details.

In conclusion, while annuities offer benefits like guaranteed income and tax-deferred growth, they also come with drawbacks such as high fees and limited liquidity. Carefully weighing these pros and cons can help you determine if annuities align with your financial goals and retirement plans.

Bottom Line

An annuity is a contract that issues you a regular payment over a fixed period of years. They’re most often used in retirement, as products that give you money each month for the rest of your life. If you buy an annuity worth $1 million, you can make a significant amount of money back on this purchase, but exactly how much can range widely. The total amount you can earn depends on the factors in your annuity contract.

Tips for Buying Annuities

If you’re unsure if an annuity is right for you, it might help to speak with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted 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.
How can you calculate annuity rates of return for yourself? Fortunately, we’ve put together a helpful cheat sheet right here that you can use to help plan out your investment options.
Use SmartAsset’s retirement calculator to get a quick estimate of how you’re doing in preparing for retirement.