How much money do you need for an annuity?

Annuities are one way to secure a stream of income in retirement. You fund an annuity with a lump sum or a series of payments, and in return, a life insurance company promises to provide you with a stream of payments — either now or in the future — for a set period or for the rest of your life.

But determining the right amount to invest in an annuity is a complex, personal decision.

In this article, we’ll break down how much money you need to buy an annuity and how your initial investment impacts your payout.

Is there a minimum investment for an annuity?

The short answer is yes. However, minimum investments can vary significantly by the type of annuity and insurance provider.

While there’s no universal minimum, understanding the typical ranges can help you plan accordingly. Minimums may be as low as $1,000 or as high as $50,000, though you’ll generally need much more than that to secure a meaningful monthly payout in retirement.

Deferred annuities allow you to spread your initial investment out over time by making a series of payments, while immediate annuities require a large upfront sum to get started.

Minimum investment amounts by annuity type

Fixed annuities

A fixed annuity often has lower minimum investment requirements than variable or indexed annuities, sometimes as low as $1,000 or less — or as high as $50,000 or more. Many fixed annuities, such as multi-year guaranteed annuities, function similarly to certificates of deposit. They offer a guaranteed rate of return, making them a popular choice for risk-averse investors.

Variable annuities

A variable annuity generally requires a higher initial investment, typically ranging from $5,000 to $25,000 or more.

With this type of annuity, the life insurance company invests your money in a variety of sub-accounts, similar to mutual funds, offering the potential for higher returns but also greater risk.

Indexed annuities

An indexed annuity typically has minimum investment requirements between $5,000 and $25,000. These annuities link their returns to a specific market index, such as the S&P 500, offering a balance of growth potential and downside protection.

Deferred annuities

A deferred annuity allows you to make a series of premium payments over time and delay receiving income until a future date, often retirement. This allows your investment to grow tax-deferred.

“Generally speaking, deferred annuities are going to have much smaller minimums because they accept ongoing investments,” says Scott Witt, a fee-only insurance advisor and actuary at Witt Actuarial Services in New Berlin, Wisconsin. “With some carriers, it’s possible to open an annuity with as little as $100 per month, though I’ve also seen reference to a minimum threshold of $1,000 to $10,000.”

Immediate annuities

An immediate annuity pays out almost immediately upon purchase, so the entire amount you invest becomes the principal for your income stream.

“For immediate annuities, the minimum threshold is much higher,” says Witt. “In my experience, it’s probably something like $50,000 to $100,000.”

That’s because you’re funding the entire annuity contract —- which may be designed to last for the rest of your life — with a single lump sum.

Other factors impacting an initial annuity investment amount

How much money you put down to fund an annuity contract directly impacts the amount of income you’ll receive once payouts begin. A larger investment translates into a higher income stream. However, the specific payout amount also depends on several other factors.

• Costs and fees: Annuities typically come with a host of fees, including mortality and expense charges and commissions. These fees can reduce your overall return, so it’s important to understand the cost structure before investing. Otherwise, you might end up with a smaller payout than you expected.
• Annuity riders: Many annuities offer optional riders that provide additional benefits, such as long-term care protection or death benefits. These riders come with extra costs, which can impact your initial investment and payout.
• Your age and life expectancy: Your age and life expectancy can influence the type of annuity you choose and the amount you need to invest to achieve your desired payout. Younger people have a longer time horizon, for example, which may give them the flexibility to make a smaller initial investment, especially with deferred annuities. On the flip side, those closer to retirement often need to invest more to achieve their income goals.

OK, so how much money do you need to buy an annuity?

While understanding minimum investment amounts is helpful, remember that to secure a meaningful retirement income stream, you’ll need to invest significantly more. Instead of focusing on an annuity provider’s minimum threshold, take a peek at their maximum investment amount, too. It’s often in the $1 million to $2 million range.

Your financial goals, risk tolerance, time horizon, liquidity needs and other sources of retirement income should all be carefully considered when deciding how much money to invest in an annuity.

Even if you invest a lot of money into an annuity, the actual payout can vary widely based on the type of annuity you choose, interest rates, annuitization options and fees.

Despite the high price tag annuities typically carry, experts generally recommend allocating a relatively small portion of your retirement savings to annuities, usually no more than 5 to 10 percent. That’s why annuities are often marketed to people with high net worths.

Diversifying your portfolio with a combination of annuities, Social Security and other investments can help mitigate risk and ensure a steady cash flow in retirement.

To get a better picture of potential payouts based on your initial investment, consider using Bankrate’s annuity calculator. This tool lets you input different factors — such as your starting principle, interest rate and years until payout — to estimate your potential annuity payments.

Bottom line

Determining how much money to invest in an annuity is a personal decision. It requires careful consideration of your financial situation and retirement goals. While it’s essential to understand the minimum investment requirements for different annuity types, it’s equally important to recognize that a substantial initial investment is often required to generate a worthwhile income stream in retirement.

By carefully evaluating your options, using annuity calculators and consulting with a financial advisor, you can make an informed decision about how much to invest in an annuity.