When you need another stream of income for retirement, you might consider an annuity. You purchase the annuity from an insurance company and receive payments back at a later date. Before buying an annuity, it's important to consider how much monthly income it might generate. For example, how much does a $300,000 annuity pay per month? And is it enough to live on in retirement? Some simple calculations can help you decide if an annuity is right for you.
A financial advisor can help you add different streams of income to your retirement plan.
What Is an Annuity?
An annuity is a financial arrangement in which you pay premiums to an insurance company, in exchange for payments made back to you at some future date. Some annuities are immediate, meaning there's only a small gap between the time you pay the premiums and the time payments begin. For example, you might have an immediate annuity that begins making payments within 12 months.
Other annuities are deferred, meaning payments begin at a future date. For instance, you might purchase a deferred annuity at age 55 with the intention of beginning payments when you retire at age 65. You may receive one lump sum payment or monthly payments with either an immediate or deferred annuity.
Some annuities can grow in value over time since they earn interest, but the rate of growth can depend on how the money in an annuity is invested. A fixed annuity, for example, guarantees a specific rate of return based on current interest rates. A variable annuity, on the other hand, offers a rate of return that's tied to an underlying investment or group of investments.
How Much Does a $300,000 Annuity Pay Per Month?
How much a $300,000 annuity pays per month largely depends on when you purchase the annuity, how annuity funds are invested and how much time it has to grow. Using an annuity calculator can help you estimate how much money a $300,000 annuity (or an annuity in any other amount) may generate in monthly income.
Say that you're 43 years old now. You purchase a $300,000 deferred annuity today with the intention of beginning withdrawals at age 65. Your annuity company gives you four options for receiving payouts, each of which will generate a different amount of monthly income. Here's how much income a $300,000 fixed annuity might pay per month:
$3,517 if you choose single life only, which allows you to receive income for life but does not offer a death benefit to your beneficiaries.
$3,474 if you choose single life with 10-year certain, which allows you to receive income for life and pays any remaining income to your beneficiaries if you pass away within the first 10 years of the payment period.
$3,357 if you choose single life with 20-year certain, which extends the window in which beneficiaries can receive payments to 20 years.
$3,504 if you choose single life with cash refund, which pays you lifetime income and offers your beneficiaries a lump-sum payment of the original investment, less any payments made to date.
Now, say that you're 65 years old and you want to purchase an immediate annuity with payments beginning right away. Here's how much a $300,000 annuity would pay in monthly income in that scenario, assuming the same four payment options:
$1,635 if you choose single life only, which allows you to receive income for life but does not offer a death benefit to your beneficiaries.
$1,656 if you choose single life with 10-year certain, which allows you to receive income for life and pays any remaining income to your beneficiaries if you pass away within the first 10 years of the payment period.
$1,569 if you choose single life with 20-year certain, which extends the window in which beneficiaries can receive payments to 20 years.
$1,599 if you choose single life with cash refund, which pays you lifetime income and offers your beneficiaries a lump-sum payment of the original investment, less any payments made to date.
Both sets of calculations assume that you are the only person who will receive income from the annuity during your lifetime, with some payment options allowing money to be passed on to one or more named beneficiaries. If you're married and would like the annuity to pay money out to your spouse for the remainder of their lifetime after you pass away, that would change the amount of monthly income you'd receive.
Specifically, your monthly payments from the annuity would be less. How much less can depend on your life expectancy and your spouse's life expectancy. If you have a specific monthly income need that you would like an annuity to meet, you might have to adjust the annuity amount to produce that level of income for yourself and your spouse.
How Much Monthly Income Can I Expect From an Annuity?
The amount of monthly income an annuity generates depends largely on the type of annuity, its face value and how much interest the annuity earns. The amount can be anywhere from a few hundred dollars a month to a few thousand dollars. Generally speaking, the larger the annuity and the longer the gap between the time you purchase it and the time you begin making withdrawals, the larger the monthly payment is likely to be.
The better question to ask might be how much money do you need an annuity to generate in monthly income? If you're considering an annuity for retirement, it's important to consider what income sources you already have. For example, that might include:
Traditional or Roth IRA withdrawals
Dividend income or capital gains income from taxable investments held in a brokerage account
Passive income generated by real estate investments
Social Security retirement benefits
Interest income from certificates of deposit (CDs) or money market accounts
Liquid savings in a high-yield savings account
Current income from a part-time job, side hustle or side business
Asking those kinds of questions can help you decide if an annuity is something you need and if so, how large of an annuity is necessary to meet your retirement income goals.
If you're interested in purchasing an annuity, it may be helpful to talk to an annuity expert or your financial advisor. Annuities and annuity companies are not created equally and these financial products can sometimes be confusing to understand. Your financial advisor can help you to assess your income needs for retirement and offer guidance on the types of annuities that may best fit your situation.
Annuities can help to supplement other sources of retirement income, though they aren't necessarily right for everyone. If you're considering a $300,000 annuity, it's helpful to know how much money it could put back into your pocket each month during retirement to decide if the upfront cost is worth it.
Retirement Planning Tips
Consider talking to a financial advisor about the pros and cons of an annuity to help decide if it's something you should include in your retirement plan. SmartAsset's free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
When comparing annuity products, pay close attention to the fees you might pay. Annuities can carry numerous charges, including surrender fees if you decide that it's not right for you after all. Also, be aware of the annuity company's credit ratings. Choosing an annuity company with strong credit ratings reduces the likelihood that the company will go bankrupt and be unable to make annuity payments back to you when the time comes.