Cost of an Annuity

The cost of an annuity generally involves the premium, or the initial investment, and any fees and commissions associated with the contract. Combined, these factors can total in the tens or hundreds of thousands of dollars. The more you put into the annuity initially, the more you can expect to receive when the contract annuitizes.

The amount of money you need to start an annuity depends on the type of annuity you purchase. If you shop around, you should be able to buy an annuity for an initial investment of less than $10,000.

“For your MYGAs, which is a multi-year guaranteed annuity, some are $2,500,” Joe Liekweg, an agent at Insuractive with an extensive annuity background told Annuity.org. “But I’d say for most fixed annuities, you’re looking at anywhere from a minimum of $5,000 to $10,000.”

You can continue investing into a deferred annuity up to one or two million dollars — or even more if you get a special exception from the company that sells you the annuity.

Different types of annuities require different minimum investment amounts. This is largely because of how they are set up to be purchased, the way they pay out and the type of long-term goals they address.

Consider how much money you must invest overall and how an annuity fits into your long-term financial plans.

“It’s based on your liquidity and what you need to have accessible to you at all times because an annuity does lock up your money,” Liekweg said.

It’s important to know what annuity fees and commissions you’ll have when buying an annuity.

These can vary from company to company, the type of annuity you choose and how you customize your annuity.

While fees differ widely, variable annuities typically have the highest fees of any type of annuity. These typically run about 2% to 3% of the value of the annuity per year.

Annuity rates can also impact the cost of the annuity. The rate of an annuity refers to how much the contract’s value grows over a period of time. Different annuities calculate rates differently; a fixed annuity earns interest at a guaranteed rate that never changes, while the growth of variable and indexed annuities fluctuates based on market performance.

“The interest rates paid on investments in an annuity contract determine how much future income the annuity will provide,” said R.J. Weiss, a Certified Financial Planner and founder of the personal finance site The Ways to Wealth. “The higher the rate, the more income the annuity will pay.”

Annuity interest rates tend to rise with interest rates on other financial products, making them a better investment during times of rising interest rates. The average payout of an immediate annuity increased by 11% for men and 13% for women from January to May of 2022, according to CANNEX Financial Exchanges Limited. During this period, the Fed issued multiple interest rate hikes to curb inflation, causing rates to surge across the financial system.

Purchasing an annuity with the best rates is the key to getting the most out of your money. With a higher interest rate, you can invest less money to get the same payout you would if interest rates were lower.

Generally, the more money you put into an annuity, the more you will receive in your payout. Payouts can vary depending on the type of annuity you buy. You can use an annuity calculator to determine what your payout will be.

For example, let’s say you are a man who invested the minimum amount of $25,000 in an immediate annuity at age 67 — the retirement age for full Social Security benefits. You’d begin collecting monthly payments of $125.95 immediately every month for the rest of your life.

But if you were to use a portion of your retirement savings to make a larger investment — say $125,000 — your monthly payout would be $629.74.

For immediate annuities, your age, sex and amount of your investment all play a part in your monthly payout.

Life expectancy affects the difference in monthly payout amounts between men and women. Because women tend to live longer, the lifetime payout is spread out over more years.

The things to consider when deciding how much to invest depend on the type of annuity, interest rates or stock indexes, your age when you buy the annuity and your expected retirement age.

There are several questions to ask the annuity agent, your financial advisor and yourself before buying an annuity.

Remember that annuities limit the accessibility options to the money you invest. You will need to weigh your liquidity against the needs a lifetime income from an annuity will deliver.

This is true whether you’re considering converting part of your retirement savings into an annuity right before retirement or if you’re considering how much to invest in annuities versus other investments when you’re in your 30s or 40s.

“It wouldn’t be suitable to take 100% of your money and throw it into an annuity and lock it up. That’s just not a good thing,” Liekweg said.

The bottom line is that you should ask yourself what you want your money to do for you — and then discuss that with your financial advisor or the agent selling the annuity.

“There has to be a conversation between you and the agent that’s helping you about that suitability factor. And that helps break down what allocations of your money you put into an annuity,” Liekweg said.