If you’re looking for alternative ways outside of the stock market and bonds to build retirement income, an annuity could be right for you. Whether you’re nearing retirement age or have decades ahead of you, a $500,000 annuity can provide steady, reliable retirement income that’s part of your financial foundation for the rest of your life. Before making an investment decision, you may want to first speak with a financial advisor who can help you create a financial plan that meets your unique goals.
What is an annuity?
An annuity is an insurance policy that provides monthly payments for a set period of time, for the rest of your life, or both. Individuals or couples typically purchase annuities to build income during retirement.
Unlike an IRA or 401(k), annuities provide guaranteed income under a contract. When you pay into an annuity, you’ll get your money plus accrued interest back over time.
Generating adequate retirement income can be difficult. To address this problem, annuity payments can supplement distributions from an IRA or 401(k). Additionally, your annuity income can help you delay your 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 suggests. It will be paid off over time according to this set price.
Variable annuities invest the funds in the account with higher risk and higher reward. Your rate of return and payment increase and decrease according to the annuity 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 over a long period of time or for life. Therefore, the annuity you set must create an amount specifically for your lifestyle.
Annuities provide two different payment options: immediate and deferred. An immediate annuity will send you monthly payments as soon as you buy 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?
The annuity payment depends on the value of the annuity, the type of annuity, the company you choose and your age. You can also guarantee that you receive payments even if your annuity runs out through an income rider.
What you get from your annuity will vary depending 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 annually from your annuity.
How much does a $500,000 annuity pay per month?
Annuity payment amounts depend on a myriad of factors, including whether the payments are fixed or indexed, the interest rate, how old you are when you buy it, and how many years it will be before you start receiving payments. The table below estimates your payments if you buy a 3% annuity at age 55 and start receiving payments immediately. Please note that this is just an example. Given the huge variety of riders, terms and conditions, payouts from another $500,000 will vary.
Example of Immediate Payouts for $500,000 Annuity By Age Age Monthly Payments Annual Payments 55 $2,360.54 $28,326.48 56 $2,427.11 $29,125.32 57 $2,499.72 $29,996.64 58 $2,579.20 $30,950.40 59 $2,666.52 $31,998.24 60 $2,762.87 $33,154.44 61 $2,869.66 $34,435.92 62 $2,988.65 $35,863.80 63 $3,121.99 $37,463.88 64 $3,272.36 $39,268.32 65 $3,443.18 $41,318.16 66 $3,638.83 $43,665.96 67 $3,865.04 $46,380.48 68 $4,129.44 $49,553.28 69 $4,442.47 $53,309.64 70 $4,818.70 $57,824.40 Watch out for annuity fees
All annuities have fees, so make sure you know the details before committing to one. A high-yielding annuity may also have higher-than-expected fees. Annuity fees can take the following forms:
Mortality risk and expense fees
Early withdrawal fees and tax penalties
Annual contract fee
Broker commissions and investment management fees
These costs affect your monthly payment. When looking to buy an annuity, check all the details in the contract to make sure you understand the terms, especially the amount you will receive.
Should I buy a $500,000 annuity?
A $500,000 annuity could be helpful for your retirement plan, especially if you’ve already maxed out your investment accounts. Here’s a list of pros and cons to help you determine whether an annuity should be part of your retirement strategy.
Annuities can provide you with income for life, regardless of how the stock market performs.
Annuities grow tax-free.
Monthly payments can help you defer your Social Security payments for a few years, maximizing your Social Security benefit along the way.
Payments can start immediately after purchase.
Some annuities will continue to be paid even after the fund is exhausted.
Fees can be excessive and unclear.
Large sums of money are required to secure it.
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 that is not interrupted by market volatility. Monthly payments can start the day you retire and last for life. However, high fees and low rates of return can hinder the fund’s ability to provide you with sufficient income. Depending on your financial situation, a $500,000 annuity could be a key element in your retirement strategy and is worth exploring. Talk to a financial advisor today if you’re thinking about buying an annuity.
Consider talking to a financial advisor about whether an annuity should be part of your retirement planning, and if so, what type. Finding the right financial advisor to suit your needs doesn’t have to be difficult. 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 to help you reach your financial goals, get started now.
Consider how the annuity income will be treated for tax purposes when you start receiving payments. Whether you buy a non-qualified annuity or a qualified annuity determines your tax liability.
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