Investing without risk often seems like a financial fantasy. Yet an annuity promises exactly that: converting a lump sum into a stable income stream, usually for retirement. An annuity is essentially a financial product sold by insurance companies that guarantees a fixed or variable payment to the buyer at regular intervals. It is a favorite option for people who want to stabilize their financial future after retirement.
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For those considering an annuity, it is crucial to understand how much it pays out each month. With a $600,000 annuity investment, returns can vary significantly depending on several factors, including the type of annuity, the age at which you begin receiving payments and your gender.
Types of annuities and their impact on payments
Annuities come in different forms, each of which has a different impact on the payout:
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Immediate annuities: These are paid out shortly after the initial investment. For example, investing $600,000 in an immediate annuity could yield different outcomes depending on when payments begin. As of May 2024, starting payments at age 60 could result in an annual income of $43,200, which works out to about $3,600 per month. After age 65, this could increase to $47,580 per year, or about $3,965 per month. Delaying until age 70 increases the payout to $51,300 per year or about $4,275 per month.
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Deferred annuities: These include a waiting period before payments begin, allowing the investment to grow. The longer you wait, the higher the potential monthly payments because the money has more time to accrue interest.
The role of gender in annuity payments
Interestingly, gender can also influence annuity payouts. Historically, because women tend to live longer than men, they can receive slightly lower monthly payments over a longer period of time, assuming the same age and investment amount. This is because the insurer’s risk assessment and actuarial calculations predict a longer payment term.
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What happens if you die early?
A common problem with annuities is the scenario that you die sooner than expected. Suppose a buyer receives annuity payments at age 65, but dies at age 69. Depending on the type of annuity chosen, there may be different consequences:
Annuity: No further payments would be made and the insurer would keep the remaining money.
Annuity with guarantee period: If the annuity had a guaranteed period (for example, ten years) and the buyer dies four years later, payments continue to the designated beneficiary until the end of the ten years.
Costs associated with annuities
Annuities often have various costs associated with them that can affect your overall return. These fees may vary depending on the insurance company and the specific annuity product. That’s why you’ll want to read the fine print and ask questions before purchasing an annuity.
Below are some common costs associated with annuities:
Surrender charges: These are charges imposed if you withdraw money from your annuity before a specified surrender period, which usually lasts several years. The lump sum payment usually decreases over time until it disappears.
Mortality and Expense Risk (M&E) costs: These costs compensate the insurance company for the risk they take in guaranteeing your lifetime income. M&E costs typically range from 0.50% to 2% of your contract value.
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Administration fees: These cover the costs of maintaining your annuity account, such as record keeping and customer service. Administration fees are often charged annually as a flat fee or as a percentage of your account value.
Underlying fund fees: If your annuity invests in mutual funds, you are also subject to underlying fund fees, which cover the costs of managing the investments. These costs can vary widely depending on the specific funds.
Rider fees: Some annuities offer optional riders that provide additional benefits, such as a guaranteed minimum income or a death benefit. These riders often incur additional costs.
Exploring annuity scenarios
If you are considering an annuity as part of your retirement plan, it is worth having a thorough discussion with a financial advisor. Together you can explore different scenarios and payout options to see if an annuity really fits your financial goals and lifestyle.
Keep in mind that annuities are not a one-size-fits-all solution. In some cases, other investment strategies or retirement products may be better suited to your individual needs.
By carefully considering all your options and working with a financial advisor, you can ensure that your retirement income plan is tailored to your specific needs and provides you with the financial security you deserve.
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This article How Much Cash Can a $600,000 Annuity Pay You Monthly? originally appeared on Benzinga.com
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