How to Calculate Annuity Payout￼
One of the ways to create a predictable income stream during retirement is by funding an annuity. (Learn more about what an annuity is here.) When you own an annuity, you will know how often your income payments will come and how much income you will have.
An annuity can be set up to provide income for a specific number of years, but many people opt for income guaranteed to last as long as they live. In fact, annuities are one of the best ways to fight longevity risk – the risk of outliving your money in retirement. That may leave you wondering, “Since I don’t know how long I am going to live, how does the insurance company calculate my annuity payout?”
Your insurance company uses a payout rate to calculate annuity payments. The payout rate is the percentage of your annuity’s balance that will be paid to you each year. You may be familiar with “The 4% Rule,” that advisors have used as guidance for how much of your retirement portfolio you should be able to withdraw each year. With annuities, payout rates are commonly higher. Plus, the insurance company guarantees a market downturn will not affect your income checks.
The payout rate will be based on your age, so the older you are when you start annuity income, the higher your payout rate will be. For example, with one A-rated company your payout rate may be 5.75% if you start your income at age 65, and 6.15% if you start income at age 66.
Let’s look at a case where a 66 year old funds an annuity with $1,000,000. With a 6.15% payout rate, this retiree will receive $61,500 each and every year for life. Annuity owners can create even more peace of mind by selecting a guaranteed income stream for as long as both they and their spouse live.
When the joint lifetime income option is selected, the insurance company will reduce the payout rate. For our example above, the joint option for 66 year olds will have a 5.65% payout rate. That means this couple will have a guaranteed income of $56,500 per year as long as one of them is living. Even if they’ve been paid out more than their total balance, the income checks are guaranteed.
You may be wondering what happens if your annuity has a positive balance when you pass away. With an annuity, you can specify in advance which people or organizations you’d like the money to go without having to include the annuity in a will or trust.
All annuities can be used to create lifetime income, but not all annuities are designed to maximize income in retirement. Payout rates, bonuses, and income value growth guarantees can all be leveraged to provide an income solution that fits your timetable and needs. The professionals at DeWitt & Dunn are here to help! If you’d like to discuss how annuities may fit into your overall retirement strategy, schedule an in-office appointment or teleconference here.
Want to learn more? Cathy DeWitt Dunn regularly appears as a guest on local news stations as an expert in her field. Cathy also hosts DeWitt & Dunn Financial Services Radio each weekend and is the voice of the DeWitt & Dunn Financial Podcast.
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Disclosure: For informational and educational purposes only. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor.
Guarantees are subject to the claims paying ability of issuing insurance company.