How much monthly income can your 401(k) buy? A walk-through with the math
An income rider turns savings into a paycheck for life. Here's exactly how the number is calculated, so you can check any quote you're given.
Most fixed indexed annuities offer an optional lifetime income rider. It guarantees a yearly income for as long as you live, even if your account value later runs to zero. The income is calculated with two numbers.
Number 1: the income base
When you start, your income base equals your deposit. Each year you wait before turning income on, many riders grow the base by a set "roll-up" percentage. Some use simple interest, some compound it, and most stop after about 10 years.
The income base is a number used only to calculate your income. It isn't cash: you can't withdraw it or leave it to your family. Your account value is the real money, and that's what your beneficiaries receive.
Number 2: the payout rate
When you turn income on, the insurer applies a payout percentage based on your age at that time. The older you are when income starts, the higher the rate. Joint income for you and a spouse pays a lower rate, because it's expected to last longer.
The math, with examples
These examples use the same hypothetical assumptions as the calculator on this site: a 7% simple roll-up for up to 10 years of waiting, and a payout rate of 4.5% at 55 that rises 0.12 percentage points for each year after that. They are illustrations, not quotes.
| $300,000 rolled over at age 52 | Income at 57 | Income at 62 |
|---|---|---|
| Years waiting | 5 | 10 |
| Income base (7% simple roll-up) | $405,000 | $510,000 |
| Payout rate at that age | 4.74% | 5.34% |
| Yearly income for life | $19,197 | $27,234 |
| Monthly income for life | $1,600 | $2,269 |
The trade-off is plain: waiting five more years in this example adds about $670 a month, for life. Neither choice is wrong. It depends on when you need the money and on what else you have coming in.
What the rider costs
Income riders typically charge a yearly fee of around 1% of the income base, taken from your account value. That fee is the price of the guarantee. If you never plan to use the income, you probably shouldn't pay for the rider.
Taxes
Income from an annuity held in an IRA, such as a 401(k) rollover, is taxed as ordinary income, the same as any IRA withdrawal.
How to check a quote you've been given
- Ask for the roll-up rate, whether it's simple or compound, and how many years it lasts.
- Ask for the payout rate at the exact age you plan to start, for single and joint income.
- Multiply: income base × payout rate = yearly income. Divide by 12 for the monthly figure.
- Ask for the rider fee and how it affects your account value over time.
A good illustration shows all of this on paper, along with what happens to your account value in a bad market.
See what your old 401(k)s could pay you each month
Use the free calculator, or take the 2-minute plan check and get your Second Paycheck report. No cost, and nothing to sign.