How Much Does a $100,000 Annuity Pay Per Month?

Wondering what a $100,000 annuity might pay you each month once you retire? There’s lots of factors to consider in order to answer that question

Introduction

Annuities have been around a long time and have been used to deal with all types of situations. They’ve certainly garnered a lot of media attention over the years, much of which has been negative in nature.

Frankly, most don’t actually know much about them. So it’s natural that given the lack of education and understanding regarding this unique financial tool, you and many others have simply shied away in the past and looked to other instruments to deal with a need or situation.

But as we get older and closer to retiring, or find ourselves already in retirement, we start to recognize the need for safe income streams we can count on during our retirement.

Streams of income that can start when we need them and that are guaranteed to last for a specific period of time we can count on. Even over the course of our remaining lifetime and potentially that of our spouse and other loved ones.

It’s not surprising that in today’s day and age, as people live longer and rely more heavily on their own savings, annuities are attracting more appeal as they guarantee an income stream that may prove critical in retirement.

But they aren’t for everyone or all situations. You need to determine if an annuity does make sense for you. Part of that is understanding how they are priced (important factors) and how much income they will pay you on a regular basis.

Today we look at those key factors and try to determine how much you can expect to be paid monthly on a $100,000 annuity.

Annuity basics

Let’s start by gaining an understanding of what they actually are at a base level.

Although the media and most people speak of them like a financial investment, such as a share of stock representing ownership in a company, they are in fact a financial contract between an insurance company and you. Think of an annuity as a tool you might want to own to address a financial need or a specific situation.

Others equate them to a form of life insurance. While annuities are offered by insurers and can provide death benefits, they are not an actual life insurance policy.

A major difference is the fact a life insurance policy pays out to beneficiaries upon your death, while an annuity is a contract generally guaranteeing you the owner a stream of income that can last your lifetime, and possibly your spouse as well.

How much will I get

Armed with a clear understanding of what an annuity is, let’s move on to what you want to know. Namely, how much will I get paid monthly?

That’s an easy enough question to ask, but truth is there are many variables and factors that go into what your payment will be with an annuity.

Unlike a $100, 000 life insurance policy, where you know your beneficiaries will receive $100k upon your death (generally tax-free), it’s a different issue altogether when it  comes to when an annuity will start to pay and how much you will receive monthly from the insurer issuing the contract.

As such, the issue of how much you will receive from a $100k annuity each month is not so easy to answer.

Issues ranging from age when purchased, rates, gender, life expectancy, type of annuity, payout period, and more, all must be considered in order to determine what you will receive monthly from the insurer you have purchased your annuity from.

Beyond those factors, there are the issues of how you will purchase or fund the annuity, when you want it to start paying out, taxes, and even the purpose for purchasing.

With those things all considered, the good news is you can determine the amount you will eventually receive on a monthly basis on your $100k annuity.

We’ll get to that shortly.

Annuity types

Before purchasing you have to have a firm idea on the type of annuity that will make sense for you and best serve your purpose.

Again, think of them as a financial tool for use within your overall portfolio. You don’t use a hammer to do the job of a screwdriver. Same holds true of annuities.

There are two main types of annuities – a fixed annuity (FA) and a fixed index annuity (FIA). You’ll also hear about variable annuities in the media, but we don’t suggest them because of their expense and risk.

1. Fixed annuity – a contract with an insurance company that guarantees a set payout on a monthly basis over time. Your principal is guaranteed, along with a rate of interest that is agreed upon at the start of the contract – for example 5.4-percent.

The annuity can be funded in one lump sum or in smaller payments over time, which are referred to as premiums. Payout can begin immediately or at a later agreed-upon date.

A fixed annuity is a safe tool that can ensure you have a steady stream of income lasting a set period of time, up to the length of your lifetime (lifetime is a more typical choice – you can’t outlive them) and potentially that of your spouse, regardless of how long you live.

2. Fixed index annuity – a contract with an insurance company that guarantees an income stream on a monthly basis over time. Rather than using a fixed interest rate (example 5.4-percent), an FIA is based on the performance of an underlying index, such as the S&P 500, or any of hundreds of other equity indices.

While based on the performance of the underlying index they are benchmarked to, they are not directly invested into the index (example – an S&P 500 mutual fund) or the market in general, so your principal is protected and your money placed in the FIA remains safe.

If the index experiences a loss (say 10-percent in a year), your principle remains the same and you experience no loss. If instead the index increases in value over the course of the year, you retain part of that gain, which increases the value of your FIA, and in turn your overall portfolio.

They are best suited for those nearing or in retirement who are seeking safe accumulation and the potential for upside appreciation, but without introducing direct market risk to their portfolio.

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Immediate or deferred

In addition to the type of annuity, there are a couple payout categories you need to consider when it comes to selection – immediate (date certain or lifetime) or deferred.

An immediate annuity starts paying out once funded for the time frame selected. Payouts generally start no later than 12 months after purchase.

This time frame can be period-certain (also referred to as fixed-period), such as 10, 15, 20 years and more. If funded in a single lump sum payment, the annuity is referred to as a Single Premium Immediate Annuity or SPIA.

The payment is fixed for the selected payout period, unless you elect an annuity with a cost-of-living adjustment (COLA) provision, which adjusts periodically for inflation.

There’s also guaranteed lifetime annuities (often referred to as guaranteed lifetime income annuities) that will pay a fixed amount for the remainder of your lifetime. Many select a lifetime annuity given they can’t outlive that income, even after the account value has diminished to zero.

And if the lifetime annuity is of the joint and survivor variety (which does cost more), the insurer will pay for the remaining lifetime of your spouse or named beneficiary, no matter how long they live.

They can also come with a death benefit that acts like a life insurance policy paying your beneficiaries when you pass.

A deferred annuity will generally start to pay at an agreed-upon period after purchase, but generally at least two 2 years after purchase. The longer the deferral the more they tend to pay given your reduced life expectancy with each passing year.

They can be funded via a single lump-sum or with multiple premiums. If you wish to continue to contribute, such as with regular contributions to a FIA, this period is referred to as the accumulation phase for the annuity.

By deferring income you are able to able to grow the account in value, resulting in higher payouts than with an immediate annuity.

Overall, a deferred annuity can enable you to have the opportunity to build income for your retirement. This can include the benefit of tax-deferred or tax-free growth depending on type – qualified, non-qualified or Roth. An example of this is growth in the value of an FIA over a period of years.

Funding

When it comes to purchasing an annuity, no matter the type, you have to consider how you will do so. Many elect to make a lump-sum payment when purchasing an annuity – such as purchasing a $100k FA.

Many others elect to fund their purchase over time, (multi-premium), enabling them to increase the size of the annuity while also allowing for growth, further increasing the value of their account. Premium payments can be made monthly, quarterly, semi-annually and annually.

Key factors

When buying an annuity, there are a number of factors you should be aware of that an insurer will consider in pricing the contract:

• Age
• Gender
• Longevity
• Rate
• Withdrawals

Age: Buying an annuity at a younger age, such as in your 40s, generally doesn’t make sense. The fees are expensive when compared to other potential instruments. Additionally, the potential for higher returns via market participation versus that of an annuity don’t tend to compare well or make sense.

When purchasing an annuity when older, say at 70 to 75, your annuity is likely to pay out more. This is primarily due to a more limited life expectancy and fewer payments on the part of the insurer.

The same can be true for purchasing a deferred annuity at say 60 that starts to pay out in 10 years at age 70. Again, there are other factors, but life expectancy sits at the top of the list.

Gender: You’ve certainly heard it more times than you can count, but females live longer than males in the U.S.

According to the National Center for Health Statistics (CDC), the average life expectancy for adults in the U.S. was 77.5 years in 2022, with females averaging 80.2 years and males averaging 74.7 years.

An insurer factors in life expectancy as well. As a result, they pay out less for women because they are expected to live longer.

Longevity: Unlike life expectancy, longevity factors both how long you may live and the length of time an insurer may have to provide an income stream.

The younger you are when you purchase the longer the insurer may have to pay, likely resulting in smaller monthly payments.

The older you are when you purchase, or if you defer the income stream from starting immediately until a later date, the larger your monthly payment, as your expected life expectancy will have diminished.

Rate: The interest rate paid by an insurer is an important factor in purchasing an annuity. In return for your premium – either lump sum or multi-premium over years, such as with an FIA – they guarantee to repay your principle plus an agreed-upon rate of interest.

The rate is based on the overall interest rate environment at the time of purchase, as well as the issuer’s rating with an independent credit rating agency, such as AM Best.

A  higher-rated insurer is more likely to be able to make payments in the future (maintaining financial stability) and will generally offer a lower rate compared to a lower-rated insurer who may have to pay a higher rate to attract business.

The rates offered tend to constantly fluctuate, so it make sense to shop around. A higher interest rate can lead to bigger payouts. An annuity with a rate of 8.5-percent will pay out more than one with a rate of 6.5-percent, which could add up considerably over time.

Withdrawals: If you withdrawal money from an annuity your eventual payout will likely be effected. And there may be fees (a surrender charge), as well as a penalty if you’re less than 59.5 years of age at the time of withdrawal.

In the case of FIAs, you can often withdrawal a limited amount without fees each year, but you might owe taxes. Withdrawals will likely reduce your payout, accordingly.

Note: FAs and FIAs can be qualified or non-qualified, depending on how funded. A qualified annuity (example – funded by a 401(K) or IRA rollover) is tax-deferred, with withdrawals generally taxable as ordinary income. A non-qualified annuity is funded with after-tax dollars, with earnings taxable when withdrawn. An annuity can also be held in a Roth IRA, in which case withdrawals are generally tax-free as the contribution was previously taxed at funding.

How to calculate

Now that you know the key factors that go into pricing of a contract and what you should be looking at when purchasing, let’s get back to the question of how much monthly income your $100,000 annuity will pay.

Calculating your monthly payouts will require doing some math.

The formula looks complicated, but you actually just plug in numbers to come to the answer.

Here’s the formula:

P = (d[1-(1 + r/k)-nk])/(r/k)

Yikes…

Not so simple looking. Let’s add in a key so you know what all these variable are:

• P = Balance at beginning of the payout period
• D = Regular withdrawal amount
• R = Annual interest rate
• K = Compounding periods, such as monthly (12), quarterly (4), semi-annually (2) and annually (1)
• N = Number of years you plan to take withdrawals

To better demonstrate, let’s assume a fixed-income immediate annuity purchased with a one-time lump-sum payment of $100k with a 6-percent rate that will pay monthly. We will calculate standard payout periods of 10, 15 and 20 years.

• A 10-year payout period looks like this: $100,000 = (d[1-(1 + 0.06/12)-10*12])/(0.06/12) = an approximate payout of $1,102 per month
• A 15-year payout period looks like this: $100,000 = (d[1-(1 + 0.06/12)-15*12])/(0.06/12) = an approximate payout of $835 per month
• A 20-year payout period looks like this: $100,000 = (d[1-(1 + 0.06/12)-20*12])/(0.06/12) = an approximate payout of $707 per month

If you’re a bit math challenged (most of us are), you can always go online and utilize an annuity calculator to help determine your payouts. Oak Harvest Financial Group has a good one which makes the calculation quick and easy, allowing you to more easily compare and shop for an annuity.

Keep in mind that you can use this for immediate and deferred fixed annuities. You just need to use the actual balance (in this case $100,000) in the account when you start the payout period.

When it comes to FIAs, calculating the monthly income you would receive is a bit different. There are level income options with an FIA where you will know what you would receive. You should definitely consult with a financial advisor to learn if this type of option makes sense for you, as it does for many.

If you don’t elect this type of option, you will be able to calculate the monthly payment once the payout period is set to begin (the accumulation period is over), as you will know the balance and can calculate your monthly payout, just as detailed above.

Regarding lifetime annuities, it’s important to consider that while they often may pay less on a monthly basis than a period-certain annuity, the can be a better option for many as they continue to provide the same guaranteed monthly payment no matter how long you (and potentially a spouse) end up living.

Two very important benefits to a lifetime annuity versus that of a period-certain annuity include:

• Potential for a much greater return on investment (ROI) – greater potential return if and as you (and spouse) live and continue to collect income over time, even beyond the point your account balance has diminished to zero
• Peace of mind knowing you can’t outlive your income

Fixed-Indexed Annuities: Consider the Alternative

This paper focuses on uncapped Fixed Indexed Annuities which, if
structured properly, can help control financial market risk, mitigate
longevity risk, and may outperform bonds over time.

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Conclusion

There’s obviously lots of variables that come into play with annuities. As such, they can seem mysterious.

But in fact they are pretty straightforward. Given they are a financial contract between you and the insurer, all the key elements are spelled out up front so you know what you are getting.

And the eventual payout is guaranteed, as long as the insurer remains solvent, which is why it’s important to look at the issuing company’s insurance rating when shopping.

Beyond that, you need to know what you are attempting to accomplish in your retirement plan in order to make a determination as to whether you need an annuity or not.

When it comes to your retirement plan, we’d be happy to look at what you have to determine if it is capable of adequately and safely meeting your goals and those of your family.

If you don’t already have one, we can assist you by creating a holistic retirement plan capable of helping you to retire with confidence.

We can build a comprehensive retirement plan utilizing strategies and planning techniques that address important issues, such as proper asset allocation (including the question of whether you need and would benefit from an annuity), risk, Social Security, taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you envision.

If you are ready to take the next step and talk to a team of annuity experts and retirement planners who can advise on all your retirement needs, and who will put your interests first, schedule a call today!

 

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