If you have $1 million saved for retirement, this article will explain how you could create lifetime income for retirement.
This can be done by using a portion of the money to create contractual lifetime income through an annuity. This can provide an income stream you cannot outlive while allowing you to keep the rest of your savings available for growth, emergencies, and other retirement goals.
Need help choosing the best annuity for your unique situation? Have questions about getting an annuity? If so, it’s best to speak with an annuity specialist. Watch this short video to see how I can help you do this (at no cost to you!)
Tip: See how much an annuity could pay you using my annuity calculator
What Is Contractual Lifetime Income?
Contractual lifetime income is retirement income backed by an insurance contract. When properly structured, it can continue for the rest of your life (even after the annuity’s account value reaches zero).
You are essentially creating a private pension for yourself. Instead of worrying about market performance or determining how much you can safely withdraw each year, you receive income according to the terms of the contract.
I independently compare thousands of options from more than 70 insurance carriers. That matters because the annuity paying the highest commission is not necessarily the one providing you with the highest lifetime income.
👉 Want to compare lifetime income options? Schedule a call with me, and I’ll show you what is currently available.
Why I Wouldn’t Put the Entire $1 Million Into an Annuity
If I had $1 million in liquid retirement savings, I would generally avoid using all of it to purchase an annuity.
Instead, I would use the smallest amount necessary to cover my essential income needs. The remaining money could stay in savings, remain invested for potential growth, or be available for unexpected expenses.
Insurance companies also typically limit how much of your total liquid assets can be placed into an annuity. In many situations, they will not allow you to use more than approximately 70% to 75% of those assets.
That helps protect you from having to withdraw money from the annuity during its surrender-charge period.
For example, if I had exactly $1 million in liquid assets, I might consider using $500,000 to create lifetime income. If I had $1.5 million or more, using a full $1 million could potentially be more reasonable, depending on my needs and overall financial situation.
💡 Pro Tip: Start with your monthly income gap. Once you know how much income Social Security, pensions, and other sources will provide, you can calculate how much additional guaranteed income you actually need.
How Much Lifetime Income Could $500,000 Create?
Let’s look at an example involving a 65-year-old retiree in Arizona using $500,000 for immediate income.
As seen in the video above, one of the highest non-reducing single-life payouts was approximately $41,000 per year. Another highly rated carrier illustrated approximately $39,000 annually.
That income was:
- Guaranteed for life
- Designed not to decrease
- Backed by the claims-paying ability of the issuing carrier
- Accompanied by a death benefit while money remained in the account
Some accelerated-income annuities initially illustrated around $46,000 per year. However, the income could later fall to approximately $30,000.
Accelerated income can make sense if you need more money before Social Security or pension benefits begin. However, most people I speak with prefer the highest available income that does not decrease.
For a married couple who were both age 65, the same $500,000 produced joint lifetime income of approximately $37,000 to $38,000 per year in the example. The income would continue as long as either spouse remained alive.
These figures are illustrations rather than promises of what is currently available. Income amounts can change based on age, state, carrier, product, interest rates, and whether the payout covers one person or two.
Could Waiting Two Years Increase the Income?
Yes. If I were 65 but planned to retire at 67, I would compare immediate income with an income stream deferred for two years.
As seen in the video above, deferring joint income on $500,000 for two years increased one carrier’s illustrated payout to approximately $43,000 annually. The same carrier’s single-life option used a higher withdrawal rate and would have produced more income because it only covered one person.
When the deposit was increased to $1 million, the highest illustrated joint payout after the two-year deferral was approximately $87,000 per year. Other highly rated carriers were close behind at roughly $86,000.
The payout rate did not increase simply because more money was deposited. The annual income approximately doubled because the premium doubled.
Deferring income can be valuable because the annuity’s income benefit base may receive bonuses and rollups before withdrawals begin.
👉 Want to see how different retirement dates affect your income? Schedule a call, and I can compare immediate and deferred options with you.
Income Benefit Base vs. Account Value
One of the most misunderstood parts of an income annuity is the difference between its income benefit base and its actual account value.
In the $500,000 example, the contract provided an income-base bonus and an 8% simple rollup. After two years, the income benefit base reached approximately $725,000.
That did not mean the owner could withdraw $725,000 in cash. The benefit base was only used to calculate lifetime income.
The actual account value was projected separately and could grow to more or less than the illustrated amount depending on index performance. However, the lifetime income guarantee did not depend on receiving positive index growth.
The purpose of the income rider is not to create a large balance you can withdraw whenever you want. Its purpose is to produce a high contractual income stream that continues even if the account value eventually reaches zero.
Conclusion
If I had $1 million saved for retirement, I would first calculate my income gap and then use only the amount necessary to create reliable lifetime income. This could mean placing a portion into an annuity while keeping the rest available for growth, emergencies, and other retirement needs.
The right strategy depends on your age, retirement date, marital status, and desired income. By comparing multiple carriers and payout options, you can build a plan that provides dependable income without unnecessarily locking up all your savings.
Need help with finding the best annuity for your retirement?
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On the call, I can help you:
- Determine what type of annuity is best for you
- Find the highest paying annuities for your unique situation
- Answer any other questions you may have