How Much Money Do You Need to Start an Annuity?

Have you considered an annuity but thought the bar for entry was too high? Think again! Depending on the type of annuity you buy, you could get started for as little as $2,500.

Annuities are insurance products issued by life insurance companies and can be great products to add to a retirement portfolio for a number of reasons , including growing tax deferred money before retirement and guaranteeing lifetime income to enjoy in retirement. But the minimum amount of money you can start with (premium) will vary by the type of annuity you purchase.

It is important to know how annuities work and note that annuities are the only financial product that can provide guaranteed monthly income. This income can help support other guaranteed income, like social security, during retirement.

Do Annuities Have a Minimum Deposit Amount?

Different types of annuities have different minimum premium requirements. This is generally because insurance companies that issue the products want to make sure they can make a profit while issuing, managing and paying commissions to agents (where applicable) on the policy.

When you’re researching different annuity products, make sure you ask the insurance company or agent what the minimum premium is. Usually, this amount will also be listed on the company’s website or in the product brochure.

Annuity Contract Prices Vary by Type

Annuities come in different varieties, the one you choose will depend on your specific financial goals and retirement plan. Evaluating the different types of annuities, their possible role in your financial plan and the best way to purchase the annuity are all important steps in the process.

Here are the primary kinds of annuities:

Fixed Annuity — Fixed annuities guarantee a fixed minimum rate of return that is paid on your premium. The rate guarantee period lasts for a specified period of time which is stipulated in your contract You may have a rate guarantee that last for one year or you may have a guarantee for a longer period of time (these products are called multi-year guaranteed annuities). Rate guarantee periods on these annuities typically last for three, five or seven years. In some cases you can fund a fixed annuity with as little as $2,500. Some flexible annuities allow an opening premium of even less..

Fixed-Index Annuity — Slightly more risky than a fixed annuity, a fixed-indexed annuity credits interest based on the performance of a market index — such as S&P 500. With these annuities your money isn’t actually invested in the index and there’s a fixed floor on the crediting rate, generally 0%. While you may not make any money if the index performs poorly, you won’t lose money in that case either.

Variable Annuity — A variable annuity is the riskiest type of annuity — you can actually lose money if the underlying investments perform poorly. But with this risk comes potential reward. If your chosen investments do well, you can earn more than either fixed or fixed-indexed annuities.

Immediate Annuity — Immediate annuities , also known as an income annuity, require a single payment and begin income payments within a year. The purpose of this product is to begin paying you retirement income ASAP through a period of annuity payments that can last the rest of your life. An immediate annuity can be fixed or variable. .

Flexible-Premium Annuity — Flexible-premium annuities are deferred annuities where you make a series of payments over time.

How Costs, Fees, and Riders Can Figure into the Purchase Price

While it is important to know how much money an annuity costs, it is equally important to understand what the costs are after you make the purchase. These costs can include:

Commissions: When an agent sells you an annuity, they generally will make a fee known as a commission. Some companies, like Canvas Annuity , do not pay commissions. These commission costs are usually built into the interest rate offered to you by the insurance company.

Annual Maintenance Fees: The most common fee assessed on an annuity contract issued by an insurance company is an annual administrative or maintenance fee. This is a charge that allows the insurance company to provide recordkeeping, account services and basic management of the annuity. The charge appears as either a percentage of your annuity balance or a flat fee. Make sure to ask your financial advisor about any fees associated with your annuity. An annuity company may waive your administrative fee for larger deposit amounts. Canvas annuities do not have maintenance fees.

Variable Annuity Investment Expense Ratios: When you buy a variable annuity , your money is connected to investments. Each of these funds charge expense ratios which reflect the annual cost of the active management of the fund. This expense ratio is deducted from the money you have invested in the fund, making this an indirect cost of owning an annuity. These rates vary wildly, but most won’t exceed 2.5% per year.

Surrender Charges: If you ever need access to cash within your annuity, most companies limit your ability to withdraw the money during a surrender charge period. If you absolutely need the cash, you will likely need to pay a surrender charge. Annuities are designed to be long-term contracts and surrender charge periods vary between 3 and 14 years on most contracts. .

Annuity Riders: Annuities of different types come with built-in features that are included in the contract, but most insurance companies provide additional optional features called riders. These riders can have a positive impact on key features of the contract including death benefit payouts, inflation adjustments, beneficiary designations and options, the timing and amount of income payments, long-term care provisions and a variety of other areas. They allow you to customize the contract to meet your unique needs.

These riders are optional, but adding them to your contract will cost you extra fees. These charges can range from fairly insignificant to quite high. So as you build the contract, take into account how much the added feature will help you out in the long run and if it is worth the additional cost.

How Purchase Price Factors into the Payout

As you consider making an annuity purchase, it is important to consider the ultimate goal. For example, if you are simply looking for a safe way to grow guaranteed money before you retire, you may consider a multi-year guaranteed annuity, or MYGA. You can use the Canvas annuity calculator to see how much you can earn depending on your single premium deposit and the number of years you’d like to commit.

For instance, if you have $100,000 that you won’t need for a few years, you can buy a Canvas 3 year MYGA that currently pays an industry-leading 3.35% per year for 3 years. That means your original $100,000 deposit will be worth $110,390 after 3 years! At the end of the 3 years you can take your money out, keep earning interest on the funds, or annuitize your contract into a stream of income payments. Remember though, the IRS may charge a penalty if you withdraw funds from any annuity prior to age 59.5.

If you are interested in purchasing a single premium immediate annuity, things are a bit more complex. You want to create a foundation of income and want to make sure your immediate annuity deposit can generate the income you need to help sustain your lifestyle.

For example, if you are a 65-year-old man and had that same $100,000 to deposit into an immediate annuity, and want to buy a life annuity (the payments last a lifetime), you can expect about $550 a month to be paid to you by the insurance company. Is this enough, along with social security, to let you live the lifestyle you desire? Is a life annuity the right product based on your estimated life expectancy?

If you want a stream of income to last for a specific period of time, say 10 years, then you will want to use an annuity calculator, or get multiple quotes from a life insurance agent or financial advisor. Income annuity calculators are available online that can help you estimate payments, which, of course, will differ by the insurance company offering the annuity.

The Bottom Line

The good news regarding funding an annuity as part of your retirement savings plan is that the minimum amounts required to buy annuity products are within reach for most American households. Make sure you are focused on the reason for buying the annuity (accumulation or income) and make your purchase accordingly. The real value from an annuity comes from the tax-deferred, solid accumulation of money prior to retirement, and the possibility of lifetime guaranteed income in retirement. Keep this in mind when considering a purchase.

If you are looking for some of the most competitive rates in the country for accumulating money, then check out Canvas annuities. Canvas allows you to buy annuities in minutes, 100% online or through a professional contact center. There is even an accumulation calculator right on the site!

Annuity.org — How Much Money Do You Need to Start an Annuity? (Turner 2022)

Smart Asset — Breaking Down Annuity Fees and Charges (Lake 2021)

The Balance — How Annuity Riders Work and Tips for Choosing One (Haithcock 2022)