As you build a retirement nest egg, there are many investment options to choose from. An annuity is one option that provides a guaranteed retirement income that can serve as a cornerstone for any financial plan. However, understanding exactly how much your annuity can pay will vary. Here’s a breakdown of how much a $250,000 annuity could pay.
Before you jump into an annuity, a financial advisor could walk you through the best options for your retirement needs and goals.
What Is an Annuity?
An annuity is a financial contract signed between an insurance company and an investor. The terms of that contract vary. But generally, the insurance company accepts investment from you. You might provide all of these funds upfront. Or make payments to the insurance company over time.
In exchange, the insurance company will make regularly defined payments over a set period of time. The income is typically used for retirement. But anyone seeking a regular stream of investment income not affected by market fluctuations can find value in an annuity.
3 Factors That Impact Payments
Before you can calculate how much a $250,000 annuity could pay, you will need to consider at least three factors that will determine your payment:
The interest rate: Your signed financial contract will specify an interest rate. A higher interest rate will lead to higher payments.
When you want the payments: You can purchase an annuity and start receiving income immediately through an immediate annuity. But you can also choose to wait with a deferred annuity. Typically, waiting for the payments to start later leads to higher payments.
Type of annuity: Annuities aren’t all the same. Generally, annuities are either considered fixed or variable. A variable annuity doesn’t guarantee returns. A fixed annuity does guarantee returns.
The table below gives examples of what a $250,000 immediate, lifetime, fixed-income annuity would pay, for annuitants of several ages. The figures derive from a Charles Schwab calculator.
Estimated Monthly Payments of a $250,000 Annuity Age Single Life Only Single Life + 10-Year Certain Single Life + 20-Year Certain Single Life + Cash Refund 85 $3,233 $2,301 $1,553 $2,297 80 $2,433 $2,078 $1,546 $1,981 75 $1,950 $1,820 $1,517 $1,728 70 $1,655 $1,600 $1,451 $1,533 65 $1,465 $1,436 $1,361 $1,387
Given that terms of an annuity vary widely how much a $250,000 annuity pays will vary. Be sure to check the details of your contract for your monthly payment.
Should You Get an Annuity?
An annuity isn’t the right fit for everyone. But it can be a reliable source of income whether or not you are retired. There are two reasons to consider an annuity. One has to do with getting a reliable income stream in retirement. A fixed annuity provides financial security in retirement. Another has to do with long life expectancy. An annuity will work out well if you have a long life to enjoy the funds.
Here are three reasons when another investment vehicle might be a better fit:
You don’t have the savings to purchase an annuity: If you want to purchase an annuity upfront, that’s a significant chunk of change. Without the necessary premium, you can’t move forward with an annuity.
You have other savings goals: Retirement is one of many savings goals. If you need to build an emergency fund, pay off debt, or save for a house, then an annuity might not be a good fit.
You have a short life expectancy: If you anticipate a shorter lifespan, then an annuity likely isn’t the best option for your dependents.
An annuity can be a useful investment option that adds value to your retirement. But it’s not the right choice for everyone. Depending on your financial circumstances you may want to also consider other options. If you can’t decide whether or not an annuity is right for you then it’s time to talk to a financial advisor. He or she can help you evaluate your entire financial picture to see where an annuity might fit into the picture.
A financial advisor can help you decide if an annuity is a good fit for your retirement plans. 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.
A key part of retirement planning is knowing how much you should save. Use SmartAsset’s free retirement calculator to see how much you should be saving.
An annuity is just one part of a retirement plan. Other streams of income might include Social Security payments. See how much you can expect to receive with our calculator.
Photo credit:©iStock.com/Pekic, ©iStock.com/JLco – Julia Amaral, ©iStock.com/FG Trade