What Are Annuities Paying? Annuity Payout Rate and Average Returns

Last updated: July 7^th, 2026

The use of annuities dates back to ancient times when the government of the Roman Empire would offer its citizens and soldiers an annual stipend, or “annua,” in exchange for a lump sum of money.

Similar exchanges continued to occur throughout Europe as a way for governments to raise capital to fund wars and other government activities. Today, the lineage of annuities has branched out into several different variations used for accumulating, preserving, and distributing retirement capital.

The most direct descendant of annua is the immediate, or income, annuity, are designed to provide a lifetime income.

Key Takeaways:

• Annuity payout rates are influenced by factors such as age, contract terms, interest rates, fees, and payout options.
• An annuity payout rate is different from an annuity rate of return because part of each payment may include a return of principal.
• Immediate annuities begin income payments shortly after purchase, while deferred annuities allow income to start at a later date.
• Different annuity types—including fixed, indexed, variable, and longevity annuities—use different methods to calculate payments and growth.
• The financial strength and claims-paying ability of the issuing insurance company are important considerations when evaluating annuities.

What is an Annuity Payout Rate?

Among the key features of certain annuities is a contractual payout stream that may be provided in exchange for an initial lump sum, subject to the terms of the contract and the claims-paying ability of the issuing insurance company. That steady stream of income is foundational to many types of annuities, as Investopedia explains.

So, what is the payout for annuities? The truth is that there is no single answer to the question “What are annuities paying?” There are many factors to take into account. Let’s take a closer look.

When evaluating and comparing annuities, it’s essential to consider the annuity payout rate, which is used to estimate the monthly payment amount based on the contract’s provisions. Unlike a universal calculation, the payment amount, or payout factor, may incorporate assumptions regarding payment periods, credited interest, expenses, and other contract-specific factors. Depending on the provisions of a fixed annuity contract, the payout factor may remain unchanged for the duration of the payout period, subject to the insurer’s claims-paying ability.

The formula for annuity payout can be expressed simply as: principal divided by the total number of payment periods, adjusted upward for interest credited over that period, and adjusted downward for any applicable fees. In practice, insurers use actuarial tables and current interest rate assumptions to arrive at the final figure, which is why two people of different ages depositing the same amount can receive meaningfully different monthly payments.

In many annuity contracts, the payout factor is designed to distribute principal and credited interest over a defined payment period, although insurer obligations vary based on the specific contract terms. Where a lifetime income option is elected, payments may continue throughout the recipient’s lifetime, subject to contractual provisions and the financial strength of the issuing insurer.

In that instance, the life insurer assumes the risk of life longevity. It is that aspect of annuities that makes them so compelling to retirees. Although lifetime income features are often designed to address longevity concerns, they do not eliminate all financial risks and depend on the insurer’s ability to meet its obligations.

While some annuity contracts may provide higher projected benefits after a longer deferral period, payment levels and credited amounts vary and should not be viewed as anticipated investment returns.

In many annuity contracts, the payout factor is designed to distribute principal and credited interest over a defined payment period, although insurer obligations vary based on the specific contract terms. For contracts that include a lifetime income option, payments may continue for the annuitant’s lifetime in accordance with the contract terms and the claims-paying ability of the issuing insurance company.

In that instance, the life insurer assumes the risk of life longevity. It is that aspect of annuities that makes them so compelling to retirees. Rather than eliminating all concerns, lifetime income features may help address longevity risk, although they involve tradeoffs and remain subject to contract terms and insurer solvency.

Generally speaking, delaying income payments may result in higher payout rates under some annuity contracts, although results can vary based on the contract. In certain annuity designs, a longer deferral period may be associated with higher projected payment amounts, but outcomes differ by contract and are not guaranteed beyond the terms of the policy.

What’s the Difference Between an Annuity Payout Rate and its Rate of Return?

However, the payout rate is different than the annuity rate of return, which is the annualized earning rate of your investment.

The following is an example for illustration only:

If the payout rate of $100,000 immediate annuity is 7.5%, generating $7,500 a year, a portion of that income is a return of principal. So, it cannot represent the real rate of return on the investment.

For this reason, a more useful comparison of immediate annuities is to consider the internal rate of return (IRR) of your investment.

Consider the following example:

David, 65 years old, purchases a $100,000 single-life immediate annuity that pays him $650 per month, or $7,800 per year. On the surface, it appears that David’s annuity is generating a 7.8% rate of return.

However, the annuity payout rate is different from the annuity rate of return. A portion of each payment represents a return of David’s principal, while the remainder reflects earnings generated by the contract.

If David lives to age 83, the annuity will pay him a total of $140,400 over 18 years.

Calculating the internal rate of return (IRR) of an immediate annuity is more complex than calculating its payout rate because it considers the timing and amount of every cash flow. In this example, David invests $100,000 upfront and receives $7,800 per year for 18 years. Using a standard IRR calculation, the annuity’s rate of return is approximately 3.84%.

Remember: life expectancy at the time of purchase is a significant factor in that IRR calculation, and it does not affect men and women equally.

Women have a longer average life expectancy than men, which means a female annuitant purchasing the same $100,000 contract at age 65 would typically receive a lower monthly payment — because the insurer is pricing a longer expected payout period — but would likely accumulate a higher total payout over her lifetime.

For a woman living to age 90 under the same contract terms, the IRR would be materially higher than David’s 3.84% figure, illustrating how longevity assumptions are built into every contract from day one.

While 3.84% is lower than the annuity payout rate, the value of a lifetime annuity becomes more apparent when the annuitant lives longer than expected. If David lives another 12 years, to age 95, and continues receiving the same income payments, the annuity’s IRR increases to approximately 6.68%. This figure represents a more accurate picture of the average annuity return than the surface-level payout rate suggests.

Conversely, if David dies at age 72, he would have received only seven years of payments, totaling $54,600. In that scenario, the annuity’s IRR would be approximately -13.18%.

Takeaway: The annuity rate of return depends heavily on how long income payments continue. The longer payments are received, the higher the effective return may be. For many retirees, the primary purpose of an immediate annuity is not to maximize investment returns, but to create a predictable stream of income that can continue for as long as they live.

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Factors that Influence Annuity Rates

Annuity rates are vital to understanding what annuities are paying, both in the big picture and for individual annuities. These rates are primarily determined by the investment performance of life insurers in their general account, which is invested in a wide range of investment-grade short-term, intermediate-term, and long-term bonds and other fixed-income vehicles.

Each of these variables directly shapes the average annuity return an investor can realistically expect. Importantly, these factors do not operate in isolation — they compound each other’s effect. A shorter life expectancy combined with a large deposit and a low-fee contract can produce a meaningfully higher payout than any one of those factors would generate on its own. Understanding how they interact is as important as understanding each factor individually.

However, other factors can influence the rate earned in annuity accounts. These include:

Interest Rates

Annuity rates can be affected by increases and decreases in interest rates.

Deposit Amount

In many annuity contracts, a larger deposit may result in higher income payments, although payout amounts vary based on contract provisions, age, interest rates, and other factors.

Life Expectancy

Depending on the annuity contract and the insurer’s assumptions, a shorter life expectancy may be associated with higher annual or monthly income payments. Why? Because there is less time to pay back all your principal.

Fees

Insurance companies charge many different types of fees to cover the cost of insuring your income. These fees are charged to your principal, which can reduce the amount available to be paid out.

Policy Options

While single-life annuities often provide higher payouts than comparable joint-life annuities, actual payout amounts vary based on the insurer, contract terms, and elected options.

Competition

The annuity marketplace is highly competitive, leading annuity providers to compete on price or rates. Certain annuity providers may offer higher initial rates alongside lower minimum credited rates, and investors should carefully review contract terms, limitations, and risks before deciding.

Because annuity payments depend on the issuing insurer’s financial strength and claims-paying ability, investors may want to consider insurers with strong ratings from A.M. Best.

Types of Annuities

There are two main types of annuities: immediate annuities and deferred annuities. The latter are annuities that will pay out in the future, and the former are annuities that begin immediate payouts.

Within these types of annuities are many variations of annuities for different scenarios.

Immediate Annuities

The premise of an immediate annuity is straightforward. In exchange for a lump sum deposit, a life insurance company makes income payments for a specified period or the life of the annuitant. The annuity payout rate is calculated based on the annuitant’s age, the length of the payment period, and an assumed rate of interest to be credited to the annuity balance.

The length of the payment period can either be a period certain (i.e., ten years) or the life expectancy of the annuitant. The total payout is calculated to deplete the annuity balance (including accumulated interest) by the end of the payment period.

For a period of a certain payout, that is the end of the life insurer’s obligation. For a lifetime payout, the insurer’s obligation continues if the annuitant is living, even if it is beyond life expectancy.

That is the risk the life insurer assumes, which is what makes immediate annuities so distinct. There is minimal risk of outliving your income. The risk is that the insurance company goes out of business.

Deferred Annuities

In the early 20th century, life insurers recognized that many people didn’t have lump sums of money to commit towards an immediate annuity or had a lump sum to invest but no immediate need for retirement income.

So, they added an accumulation component to annuities that allowed investors to “defer” income distributions into the future while the insurer guaranteed the annuity principal.

A fixed deferred annuity is a contract with a life insurer that promises to provide the principal investment while providing a minimum fixed rate of return. Withdrawals are limited to 10% of the principal value during the surrender period, which can last between three and 10 years, though some longer-term contracts may extend beyond that

Withdrawals exceeding the 10% limit will be subject to a surrender charge that commonly starts between 7% and 9% in the first year and gradually declines to zero by the final year of the surrender period. After the surrender period, withdrawals of any amount can be made, but they are taxed as ordinary income. Once all the interest earnings have been withdrawn, the principal can be withdrawn with no tax consequences.

Comparing Different Types of Annuities

We’ve described what an immediate and deferred annuity is and how they work. In many cases, investors aren’t ready to start taking income from an annuity – they’re not worried about what annuities are paying in the moment, they’re focused on the future.

So, they might invest in a deferred annuity to accumulate their capital before converting it to an immediate annuity. Here are the different types of annuities.

Deferred Income Annuity

A deferred income annuity (DIA) is like an immediate annuity in that it exchanges a lump-sum premium for contractual lifetime payments. The difference is that with immediate annuity, the payments start immediately (within one year of deposit).

In contrast, the payments for a DIA are deferred until sometime in the future, up to 40 years. A DIA appeals to retirees who have no immediate need for income and anticipate a bigger need for income in the future.

A DIA acts as longevity tool. Because the payout amount is based on your life expectancy, the longer you wait to start taking income from a DIA, the higher your monthly annuity payout amount may be.

For example, if you deposit $50,000 into a DIA at age 65 with payments to begin in 15 years at age 80, your monthly payout could be significantly higher than what an immediate annuity would provide today — because the insurer has 15 additional years to accumulate interest on your premium. Exact payout amounts vary by carrier, interest rate environment, and contract terms. A fiduciary advisor can provide current, carrier-specific illustrations.

The longer you wait to begin receiving income, whether to age 80, 85, or beyond, the higher your monthly payout may be, as the insurer has had additional years to accumulate interest, and the remaining payout period is shorter. Because the life insurer schedules your monthly payout for life, you continue to receive it if you live beyond your life expectancy.

Qualified Longevity Annuity Contract

As with the DIA, qualified longevity annuity contracts were designed to address longevity risk. They are similar to DIAs in that the income payments are deferred for a period, up to 20 years or age 85, whichever comes first.

The critical difference is that a QLAC may be purchased inside a qualified retirement plan. They can be particularly appealing to retirees who want to manage required minimum distributions (RMDs) from retirement plans, which now begin at age 73 for most current retirees — and at age 75 for those born after December 31, 1959, under the SECURE 2.0 Act.

When a retiree purchases a QLAC inside their 401(k) or traditional IRA using accumulated retirement funds, the year-end balance in the account is reduced by the amount invested in the QLAC. Because the annual RMD amount is based on the year-end account balance, the effect of the investment in a QLAC will reduce the RMD.

This is a meaningful planning tool: a retiree in a high-income year can use a QLAC to lower their RMD obligation, reduce taxable income for that year, and simultaneously lock in future contractual income — all within a single contract. For those approaching age 73 in 2026, the window to fund a QLAC before the first RMD is due makes this strategy particularly relevant to evaluate with a fiduciary advisor.

The amount that can be invested in a QLAC is subject to a lifetime contribution limit — currently $210,000 per person for 2026, as adjusted for inflation under the SECURE 2.0 Act. The previous 25% of account balance restriction was eliminated. A married couple may shelter up to $420,000 from RMD calculations.

Multi-Year Guaranteed Annuities

A multi-year fixed annuity (MYGA) is like a fixed deferred annuity but typically includes a guaranteed interest rate for a specified period, subject to the claims-paying ability of the issuing insurance company. MYGAs generally provide a fixed interest rate for a specified period, often ranging from two to 10 years, though available rates vary by insurer, contract terms, and prevailing market conditions.

Variable Annuities

The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.²

Fixed Index Annuities

Designed for investors seeking a different balance between growth potential and risk, fixed index annuities combine features of both fixed and variable annuities, although they also involve limitations, costs, and contractual terms that should be carefully evaluated. Fixed index annuities are like fixed deferred annuities except in the way the fixed yield is determined. With a fixed deferred annuity, the life insurer determines the yield based on the performance of its general account, which is invested primarily in investment-grade bonds.

The yield for an index annuity is based on the percentage gain of a stock index, such as the S&P 500. If the index experiences an increase from one year to the next, the annuity account is credited with a portion of the gain.

In exchange for contractual downside protection features, the insurer may retain a portion of the index gain, and some contracts provide a minimum credited rate. Participation rate: A participation rate helps determine how much of an index’s gain may be credited to the account, subject to any applicable caps, spreads, fees, or other contract limitations. If an index annuity has a participation rate of 80%, that is the percentage applied to the gain to determine the gross yield to be credited. If the year-to-year gain is 20%, 16% would be credited to the account. ³

Rate cap: But that is before the rate cap is applied. Each contract specifies a maximum rate that can be credited, so if the rate is capped at 8%, then, using the same example, 8% is credited to the account instead of 16%.

Viewed another way, the reduction in credited gains represents a tradeoff associated with the contract’s protection features, and investors should consider both the potential benefits and limitations when evaluating an annuity. Because participation rates and rate caps can vary significantly among products, comparing these features may help investors better understand how different contracts credit index-linked returns. Many indexed annuities provide a participation rate for a specified period under the contract, with provisions subject to the claims-paying ability of the issuing insurance company. Although an initial participation rate may be higher during an introductory period, future participation rates may change in accordance with the contract terms.

Indexed annuities can include an annual reset feature that ratchets up the principal, or basis, each year to include the prior year’s gain. An annual reset feature may retain certain previously credited gains under the contract, but fees, withdrawals, surrender charges, and insurer-specific terms can still affect the account value.

Why Choose Annuity?

The specific investment and tax properties of annuities can appeal to different investors with varying investment objectives.

Before examining each investor type, it helps to address a question many people ask before they ever speak with an advisor: What is the average return on an annuity?

The answer depends on the product type. Fixed annuities have historically delivered average returns in the range of 2% to 4%, reflecting their bond-heavy general account portfolios and principal backing. Fixed index annuities have produced average returns in the range of 4% to 7%, depending on the participation rate, rate cap, and the performance of the underlying index in a given period.

Variable annuities carry no return floor and are primarily market-dependent, with outcomes that can exceed or fall well below either of those ranges. These figures are historical averages only and are not guaranteed. Actual returns vary by carrier, contract terms, and the interest rate environment at the time of purchase. A fiduciary advisor can provide illustrations specific to current market conditions and your individual situation.

Investors who are Risk Averse

Some people prefer to put their money in vehicles that have no exposure to risk. Many investors view savings accounts, Treasury bills, and bank CDs as lower-risk options, though each product has its own features, limitations, and risk considerations.

There are many different types of risk, which could have a detrimental effect on your long-term savings if not accounted for in your savings or investment strategy. Annuities may include features intended to support value preservation, though their effectiveness can vary based on product design, applicable fees, withdrawal provisions, and the financial obligations of the issuing insurer.

Investors Who Dislike Taxes

Nobody likes to pay taxes, but for those investors in the higher tax brackets, annuities offer the benefit of tax deferral on earnings that accumulate inside the contract. However, they will have to pay taxes on their earnings when they are withdrawn.

For some individuals, withdrawing funds during retirement may result in different tax consequences than during their working years, but outcomes depend on future tax laws, income levels, and personal circumstances.

Investors Who Think Long-Term

Investors who have done a good job establishing other savings or investment accounts available to meet short-term or emergency needs can turn toward annuities for their longer-term needs.

In return for the policy features, the tax deferral, the available interest rates, and the extra layer of protection that annuities provide, the annuity provider asks that you commit your funds for a minimum period of time.

Investors Seeking Higher Interest Rates

Even risk-averse people like to get that extra benefit of half a percent or more interest credited to their accounts. The yields on annuities tend to be higher than those available on equivalent savings vehicles.

Additionally, many annuity contracts will pay an additional rate on initial deposits that exceed a certain amount. And, for CD-type annuities, the rates go up even further when the deposits are committed to a minimum contractual period (i.e., five to 10 years).⁴

Investors who don’t Like Surprises

Even risk-tolerant investors may want part of their retirement strategy to behave differently from investments that respond directly to market movements. Many annuities include contractual features designed to provide a more structured approach to accumulating assets or generating income.

Because annuities and market-based investments operate differently, some investors use them alongside other holdings as part of a broader retirement strategy.

People Concerned with Having Enough Income Throughout Retirement

Determining how to turn accumulated savings into ongoing retirement income is an important planning consideration for many individuals. As retirement approaches, investors often assess whether their available resources align with their expected spending needs, time horizon, and overall financial objectives.

What Are Annuities Paying? The Bottom Line

Annuities can play a vital role in securing your financial future, but they can be somewhat complex products to understand.

There’s no simple answer to the question “What are annuities paying?”. However, with enough understanding and research, and guidance from a fiduciary financial advisor, it is possible to determine the payouts for various annuities. Then, you make an informed choice about which option is right for you.

This guide can help with a foundational understanding of how annuities work and how to choose the right one for your circumstances. However, it would be essential to consult with an independent financial advisor who is positioned to help you find a match for your needs, objectives, and financial situation.

Annuities are not free lunches. Some annuity products — like variable annuities — can carry significant fees, lock-up periods, and limited investment options. You’ll need to consider every product carefully.

You can find more information on buying annuities here on the Dechtman Wealth Management website. Or feel free to schedule a no cost consultation with one of our advisors.

Dechtman Wealth Management, LLC is a Registered Investment Adviser. This is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Dechtman Wealth Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Dechtman Wealth Management, LLC unless a client service agreement is in place.

• Guarantees and benefits provided are based on the claims paying ability of the issuing insurance company. ↩︎
• Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. ↩︎
• Fixed or Indexed annuities are not a registered security or stock market investment and do not directly participate in any stock or equity investments or index. ↩︎
• A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses ↩︎