How Much Would a $1.5 Million Annuity Pay?

How much does a $1.5 million annuity pay depends on factors like your age at purchase, when payouts begin, and the contract’s structure. For example, buying an immediate annuity at age 65 might generate around $9,700 per month for life, while delaying payments could lead to significantly higher monthly income.

A financial advisor could help you assess whether an annuity is a good fit for your retirement plan.

What Is an Annuity?

An annuity is a contract that you make with a financial institution, typically an insurance company. On your end, you promise to make either a single lump-sum payment or a series of payments. On their end, they promise to make a fixed series of payments to you at a certain date in the future.

There are two main types of annuities. A fixed-period annuity, otherwise known as a “term” or “period certain” annuity, is one in which you receive guaranteed payments for a specific amount of time. For example, you may buy an annuity that promises to pay you $500 per month for 10 years. The contract will specify when the payments start and when they end, a period known as the “annuitization period” or “annuitization phase.”

A lifetime annuity is more common, particularly for retirement savers. With lifetime annuities you receive a guaranteed payment that begins when you retire or otherwise reach a certain age. These payments then continue for the rest of your life. The “annuitization phase” covers your whole retirement. As with fixed-period annuities, lifetime annuities generally make payments on a monthly basis. For example, you could buy an annuity that promises to pay you $500 per month for the rest of your life once you turn 70.

Both fixed-period and lifetime annuities pay more when you invest a larger upfront amount. The more money you spend on the annuity and the earlier you spend it, the more your annuity will pay out over time. For example, buying an annuity 20 years before payouts begin leads to higher monthly income than waiting just 10 years. This is because the company which sells you the annuity treats it like a loan. They take your money and use it for their own investments, then pay your money back with interest at a later date.

In all cases an annuity is structured so that you receive back the full amount that you put in plus an additional percentage. With lifetime annuities, the company will reimburse your heirs if you die before collecting payments worth at least the amount that you spent on the contract. It’s this certainty that makes annuities appealing for many retirees. With an annuity there’s no danger of completely outliving your retirement savings because, unless the bank or insurance company goes out of business, you will have a minimum guaranteed income for life.

What Does an Annuity Pay?

SmartAsset: How Much Would a $1.5 Million Annuity Pay?

Stating a single average for annuity payments is difficult because rates vary based on several factors, including:

Lump sum vs. structured payments: Annuities typically pay more when purchased with a single lump sum compared to a series of payments.
Date of purchase: The further in advance you purchase your annuity, generally the higher your return.
Amount of payment: Annuities tend to have a higher rate of return when you spend more on them.
Lifetime vs. fixed period: Fixed-period annuities tend to have different rates of return compared with lifetime annuities because these are guaranteed products, while lifetime annuities are speculative based on how long your retirement lasts.
Annuity provider: Finally, different companies will offer you different products. The exact return that you can receive depends entirely on who you buy your annuity from and what they’re willing to offer, because there is no one set of rates that everyone adheres to.

Even within these categories there is more detail because annuities can have three different structures for their returns: fixed rate, variable and indexed.

A fixed-interest annuity is one in which the return rate is set in advance. The company agrees to pay a set amount over a defined time frame. A variable annuity’s returns depend on external factors, such as market performance and the investment portfolio selected. The company specifies what the annuity’s return will be based on, and then makes payments depending on those outside factors. Finally, an indexed annuity is one in which the annuity’s return is pegged to some third-party index like the S&P 500. The company specifies what index your return will be based on and then makes payments as appropriate.

The result is that it’s extremely difficult to calculate a clear, average rate for annuity payments.

However, there is some data out there. Term certain annuities with a fixed rate of payment are the easiest to assess because these have specific numbers involved. With those products, studies have found that they currently offer rates of return ranging between 1% and 5.5%, with the average coming in around 3.2%. But you should take even those numbers with a grain of salt, since they will change based on factors ranging from how long your contract lasts to when you buy it.

How Much Does a $1.5 Million Annuity Pay?

So, with all of that said, how much should you expect out of a $1.5 million annuity?

For most people saving for retirement, this is the critical question. They want to know how much this product will pay them once they retire so they can add that to their financial planning. And the good news is that you can, indeed, know that figure. It depends on the details of the product that you plan on buying, but when you look at investing in a specific annuity you will see the exact monthly rate that you will get for any given set of circumstances.

For example, say you buy an annuity for $1.5 million from Schwab with the following details:

Payment: Lump sum up front
Age at purchase: 65
When payments begin: Immediately
Structure: Single life only
Return: Fixed return

With a single life only annuity, you pay the whole price up front and you buy a retirement product that will make regular monthly payments for the rest of your life. Based on those factors, an immediate annuity would pay you $9,755 per month for the rest of your life. If you die five years into the contract, however, your beneficiaries don’t collect anything.

To protect against the risk of dying early and not recouping your initial investment, you could purchase a period certain annuity.

Payment: Lump sum up front
Age at purchase: 65
When payments begin: Immediately
Structure: Single life with 20-year period certain
Return: Fixed return

With a single life 20-year period certain annuity, you would immediately collect $8,736 per month for the rest of your life, according to Schwab’s estimates. However, if you die within the first 20 years of the contract, your beneficiaries receive the remaining payments. For example, if you died 10 years after the annuity started paying out, your beneficiaries would collect payments for 10 more years.

But what if you still have years or even decades before you need the money? For example, say that you’re currently 45 years old and want your annuity payments to start at age 65. In this case, you could buy a deferred annuity. Investing $1.5 million in deferred annuity may look like this, according to Schwab:

Payment: Lump sum up front
Age at purchase: 45
When payments begin: 20 years
Structure: Single life
Return: Fixed return

Twenty years after buying the deferred annuity, you would receive nearly $27,000 per month for the rest of your life.

Bottom Line

Annuities are insurance products that make guaranteed payments over a set period of time or the rest of your life. They are popular retirement products given the degree of certainty they offer, but how much an annuity will pay depends entirely on the exact product you purchase.

Tips for Retirement Savers

A financial advisor help you create a financial plan for your retirement savings goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Annuities have their upsides, most importantly the certainty they can offer for retirement savers. But critics suggest that they can cost you far more than if you had spent the same amount of time invested in a simple index fund. Learn here about the pros and cons.