How much does a $1 million annuity pay?

1 min read by Unbiased team Last updated June 14, 2024

Investigate the factors influencing payouts of a $1 million annuity and learn how to optimize your returns.

Summary 

  • A $1 million annuity offers a significant and dependable income stream for retirement planning. 

  • Factors such as age, interest rates, and payout terms greatly influence the annual income from a $1 million annuity, with potential annual payouts ranging from $40,000 to $70,000 or more. 

  • Match with a financial advisor for expert advice and ensure your retirement strategy aligns with your goals and needs. 

What is an annuity? 

An annuity is a financial product that provides regular payments, which is ideal for retirement income.  

You give a lump sum to an insurance company, and they provide steady income, either immediately or later. This arrangement mitigates the risk of outliving your savings by ensuring a consistent cash flow.  

Essentially, you exchange a lump sum for future payments. The specifics of payment timing and method vary based on the annuity type, but the objective remains consistent: transforming savings into a stable income source for financial security.  

How to calculate payouts for a $1 million annuity 

Here's a step-by-step guide to calculating how much a $1 million annuity pays for various types of annuities: 

  • Immediate annuities 

With immediate annuities, payments begin almost immediately after the lump sum is paid.  

Suppose you purchase an immediate annuity for $1 million with a fixed annual payout. If the annuity offers a 5% payout rate, you will receive $50,000 per year. 

  • Deferred annuities 

Payments for deferred annuities begin at a future date.  

For instance, if you invest $1 million in a deferred annuity at age 60, with payments starting at age 70 and an annual payout rate of 6%, your annual income would be $60,000 per year, starting at age 70. 

  • Fixed annuities 

Fixed annuities provide a guaranteed payout.  

For example, a $1 million fixed annuity might offer a 5% annual interest rate, resulting in a $50,000 yearly payout. 

  • Variable annuities 

Variable annuities have payments that fluctuate based on the performance of underlying investments. If the investments perform well, your payout increases, and vice versa.  

For example, a variable annuity might have an expected return range of 4% to 8%, leading to potential annual payouts of $40,000 to $80,000. 

What are the different types of annuities? 

How do annuities work?  

Immediate annuities start paying income soon after a lump sum investment. These annuities are a good investment for retirees seeking an immediate income stream. 

Deferred annuities begin payments at a future date, making them suitable for those looking to grow their investment before starting to withdraw income. 

Fixed annuities offer guaranteed payouts and a predictable income stream. They are a good investment for risk-averse individuals who prioritize stability over potential high returns. 

Variable annuities' payouts vary based on investment performance, making them suitable for those willing to take on more risk for potentially higher returns. 

Indexed annuities provide returns linked to a market index like the S&P 500. They offer a middle ground between fixed and variable annuities, with some level of guaranteed minimum returns and potential for higher earnings. 

What factors affect annuity payments? 

Several factors influence how annuities work and payout, especially for a $1 million annuity: 

  • Type of annuity: Immediate annuities start payments right away, while deferred annuities begin later. Fixed annuities offer stable payments, whereas variable and indexed annuities depend on investment performance.  

A $1 million immediate annuity might pay around $50,000 annually, whereas a deferred annuity might pay more later due to investment growth. 

  • Age of the purchaser: Younger purchasers receive lower payments because the expected payment period is longer. Older individuals might receive higher payouts due to a shorter expected payout period.  

A 50-year-old might receive $40,000 annually from a $1 million annuity, while a 70-year-old might receive $70,000 annually. 

  • Term of payment: Lifetime annuities pay until death, offering lower annual payments compared to fixed-period annuities, which pay for a set number of years.  

A $1 million lifetime annuity for a 65-year-old might provide $50,000 annually, while a 20-year fixed-period annuity could pay $70,000 annually. 

  • Current interest rates: Higher interest rates result in higher annuity payouts, as insurers can earn more on the invested funds.  

In a high-interest-rate environment, a $1 million annuity might pay $60,000 annually, whereas in a low-interest-rate environment, it might pay $40,000 annually. 

What are the pros and cons of investing in annuities? 

Knowing how annuities are given favorable tax treatment highlights the positives of these investments, but there are also downsides to them too.  

The pros and cons of a $1 million annuity include: 

  • Pros 

One primary benefit of annuities is the predictable income stream they offer. This provides reassurance during retirement when a regular paycheck is no longer available. This predictability aids in budgeting and managing daily expenses without concerns about market fluctuations.  

Annuities also provide tax-deferred growth, allowing invested funds to grow without taxation until payment receipt begins.  

This tax advantage can significantly enhance investment growth over time, potentially allowing a $1 million annuity to accumulate more wealth compared to taxable accounts.  

  • Cons 

One significant drawback of annuities is their lack of liquidity. Once invested, accessing funds can be challenging without penalties, limiting availability for emergencies or other financial needs.  

Annuities also come with various fees, including administrative, surrender, and investment management fees, which can reduce overall returns.  

Fixed annuities are also vulnerable to inflation, which can potentially erode the purchasing power of payments over time.  

While $50,000 annually from a $1 million annuity may seem sufficient now, its value may diminish in the future due to rising living costs, making it harder to maintain a standard of living.  

Get expert financial advice 

Understanding how much a $1 million annuity pays can ensure a steady income in retirement. By understanding the different types of annuities, how to calculate their payouts, and the factors influencing these payments, you can make an informed decision about whether an annuity fits into your financial plan.  

Unbiased will connect you with a financial advisor for expert financial advice on how to align your retirement strategy with your financial goals. 

Writers

Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.