How Much Would a $5 Million Annuity Pay?

Annuities are financial contracts designed to convert a lump sum of money into a stream of income, often used as part of a retirement income strategy. With $5 million invested in an annuity, the amount of income you receive will depend on factors such as the type of annuity, payout structure and prevailing interest rates. Understanding how these variables affect payments can help you estimate how much income a $5 million annuity could provide throughout retirement.

A financial advisor can also help evaluate whether an annuity aligns with your broader retirement plan and income needs.

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 (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 whether 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 weren’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 by 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.

Factors That Determine How Much a $5 Million Annuity Pays

While a $5 million annuity can generate substantial retirement income, the exact amount you receive will vary depending on several personal and market-related factors. Insurance companies use these variables to estimate how long payments will last, how much investment return they can earn on your premium and what level of guarantees you select.

Key factors that determine how much a $5 million annuity pays include:

Your age at the time of purchase: Older buyers typically receive higher payments because insurers expect to make payments for fewer years. For example, someone purchasing a lifetime annuity at age 75 will usually receive higher monthly income than someone purchasing the same annuity at age 60.
Current interest rate environment: Annuity payout rates are heavily influenced by prevailing interest rates. When rates are higher, insurance companies can generate more return on your premium and offer higher income payments. When rates are lower, payout amounts tend to decrease.
Payout duration and structure: Choosing a fixed-term annuity, such as 10 or 20 years, will generally result in higher monthly payments than a lifetime annuity because the payments are spread over a shorter period. Lifetime annuities provide lower monthly income but guarantee payments for as long as you live, reducing the risk of outliving your savings.
Single-life vs. joint-life coverage: A single-life annuity pays income based solely on your life expectancy, which typically results in higher payments. A joint-life annuity continues payments to a spouse after your death, so monthly income is usually lower to account for the longer expected payout period.
Optional riders and features: Additional protections, such as inflation adjustments, guaranteed minimum payout periods or death benefits, can provide greater financial security but often reduce the initial income amount. These features increase the insurer’s obligation, which affects how much they can pay you each month.

Can You Retire on $5 Million?

The amount you need for retirement depends entirely on your desired lifestyle, location, healthcare needs and how long your retirement might last. It is 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 several 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.

Tips to Save More for Retirement

Planning for retirement requires strategy and discipline. By implementing these practical tips to save more for retirement, you can build a more secure financial future and enjoy your golden years with confidence:

Start early and be consistent: Time is your greatest ally when saving for retirement. The power of compound interest means that even small contributions can grow significantly over decades. Establishing a consistent savings habit in your 20s or 30s can dramatically reduce the pressure of catching up later in life.

Maximize employer matching contributions: If your employer offers a 401(k) match, contribute at least enough to get the full match. This is essentially free money that can double your retirement contributions. Even a 3% match can add tens of thousands of dollars to your retirement savings over your working years.

Automate your savings: Set up automatic transfers to your retirement accounts on payday. When saving happens automatically, you’re less likely to spend that money elsewhere. This “pay yourself first” approach ensures retirement savings become a non-negotiable part of your budget.

Gradually increase contribution percentages: Boost your retirement contributions by 1% each year or whenever you receive a raise. This incremental approach makes the increase barely noticeable in your monthly budget but significantly impacts your long-term savings. Over time, you can work toward maxing out tax-advantaged accounts.

Reduce high-interest debt: Paying off credit cards and high-interest loans frees up more money for retirement savings. The interest saved by eliminating debt often exceeds what you might earn on investments, making debt reduction an effective part of your retirement strategy.

Remember, successful retirement planning isn’t about dramatic changes but consistent, thoughtful actions over time. Small improvements to your saving habits today can translate to substantial financial security tomorrow.

Bottom Line

A couple asking their advisor how much a $5 million annuity would pay.

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.

Tips for Investing

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. 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.
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.