Key Takeaways
- An annuity is an insurance contract that, after an initial premium, provides a guaranteed income stream now or in the future.
- A mortgage is a loan from a bank or credit union for buying a home with consistent and predictable payments.
- By using annuity income, you could cover your mortgage payments each month.
Have you ever considered using your annuity to pay your mortgage? One significant lifestyle change retirees often make is downsizing their homes to better suit their new circumstances, whether that means lower maintenance, easier mobility or relocating to a warmer climate.
However, the recent wave of inflation has driven up home prices and monthly mortgage costs, creating a substantial barrier for many Americans looking to change residences. Since 2020, average home prices nationwide have surged by an astonishing 47.1%. Unfortunately, most retirees haven’t experienced similar growth in their retirement income from investments or Social Security.
Given these developments, it’s understandable that many retirees may feel uncertain about their ability to consistently cover a monthly mortgage. This is where utilizing an annuity can provide a viable solution, offering financial security and peace of mind in uncertain times.
Covering debts in retirement can be a huge stressor for retirees. Mortgage debt, although more benign compared to other debt from credit cards or personal loans, can still be a stressor during such a major life change. Without the comfort of a steady paycheck, it has caused more than a few past clients to consider delaying retirement until they were clear of their liabilities. This doesn’t need to be the case.
Annuities and other fixed guaranteed options can be used to match the expected payments and ensure that mortgage payments will be covered regardless of market performance. The prevailing interest rate environment is an important factor because this works best when mortgage rates are equal to or lower than the rate of return on these products. Creating a strategy like this takes a little time and a little math, but it is feasible for most investors and offers a path to lower stress in retirement.
Stephen Kates, CFP®Principal Financial Analyst for Annuity.orgStephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.
What Is an Annuity?
Before we delve into this unique strategy, let’s first cover the basics of annuities. An annuity is an insurance contract that, after an initial premium payment, provides a guaranteed stream of income now or in the future.
There are several types of annuities, but this article will focus on fixed annuities and income annuities.
A fixed annuity provides a guaranteed stream of income with a set percentage over a specified period of time. It offers predictable returns and stability.
Income annuities can have immediate payouts or delayed payouts (deferred income annuities), depending on the contract terms. Payments typically cease upon the owner’s death unless a rider is added to continue payments to a spouse or beneficiary.
Understanding these fundamentals will help you assess how annuities can fit into your financial strategy and potentially help cover your mortgage payments.
How soon are you retiring?
What is your goal for purchasing an annuity?
Select all that apply
What Is a Mortgage?
A mortgage is a contractual agreement in which a bank or credit union lends money at an interest rate to purchase a new home. Like annuities, mortgages involve a predictable level payment schedule, which allows them to work in harmony. Understanding this connection helps in assessing how annuities might complement mortgage payments effectively.
Benefits of Using an Annuity To Pay a Mortgage
When we pair a mortgage payment with an annuity, it creates a conduit between an income source and a particular expense. By using an annuity aligned with the costs of the mortgage, we guarantee enough steady income to cover principal and interest or more.
Another important consideration is the tax advantages offered by annuities. This is a benefit many other investing vehicles like CDs or treasury bonds do not offer. Your earnings are not taxed until they are withdrawn from the account, allowing for tax-deferred growth until the withdrawal is made. Income annuity payments will only be taxable in proportion to the amount of untaxed growth within the contract. This alleviates a substantial tax burden compared to using distributions from an individual retirement account (IRA) to cover the bill.
Selecting the Ideal Annuity
The most logical type of annuities for paying a mortgage are a fixed annuity or an income annuity. Both offer a consistent and, most importantly, guaranteed flow of money over the length of the contract.
Income annuities offer flexible payment options. For a mortgage with a set end date, a period certain annuity—designed to end at a specific time—could be an ideal fit, often providing higher payouts than other options. Alternatively, retirees may opt for lifetime payments, ensuring income continues even after the mortgage is paid off.
Fixed annuities typically have a set maturity of between three and 10 years, which makes them convenient strategies for retirees with 10 years or less left on a mortgage. Unlike an income annuity, the fixed annuity strategy would not be annuitized. Therefore, owners must ensure they do not draw more from the contract than is allowed per year under the penalty-free surrender schedule. Once the mortgage is paid off, any remaining funds in the annuity can either stay invested, be redirected into other financial opportunities or be annuitized to provide guaranteed lifetime income.
Risks and Considerations
A key risk of using an annuity to cover mortgage payments is the limited liquidity. Accessing funds beyond the 10% penalty-free withdrawal allowance in most fixed annuities can trigger significant surrender charges, undermining the strategy. Income annuities, often irrevocable, provide minimal flexibility unless optional riders are added. Retirees should maintain sufficient emergency funds to handle unexpected expenses throughout the annuity’s contract term.
Premature death is another critical risk to address when using annuities for mortgage payments. Proper contract design and clear beneficiary coordination are essential to ensure assets are passed on efficiently and avoid probate delays. If a life-only income annuity is chosen, any remaining balance after the owner’s death may revert to the insurance company, regardless of the total payouts. It’s important to carefully plan how the annuity’s remaining value will be managed after the death of one or both owners to protect loved ones financially.
How To Effectively Use Annuities
This approach leverages a 10-year multi-year guaranteed annuity (MYGA) to generate consistent cash flow, effectively covering a $1,250 monthly mortgage payment. The initial $300,000 investment with a 6.0% return ensures stable payments without risking principal or experiencing cash flow interruptions.
By breaking down the annual return of the fixed annuity, you can see that not only is the mortgage fully covered, but there is also a small monthly surplus that adds to the overall investment.
Next, let’s explore how these returns grow year by year through a 10-year accumulation schedule to visualize the compounding effect and surplus.
| Year | Balance | Growth | Mortgage Withdrawal | Ending Balance |
| 1 | $300,000 | $18,000 | $15,000 | $303,000 |
| 2 | $303,000 | $18,180 | $15,000 | $306,180 |
| 3 | $306,180 | $18,371 | $15,000 | $309,551 |
| 4 | $309,551 | $18,573 | $15,000 | $313,124 |
| 5 | $313,124 | $18,787 | $15,000 | $316,911 |
| 6 | $316,911 | $19,015 | $15,000 | $320,926 |
| 7 | $320,926 | $19,256 | $15,000 | $325,182 |
| 8 | $325,182 | $19,511 | $15,000 | $329,692 |
| 9 | $329,692 | $19,782 | $15,000 | $334,474 |
| 10 | $334,474 | $20,068 | $15,000 | $339,542 |
An annuity is an insurance contract that, upon an initial premium, provides a fixed rate of return or guaranteed stream of income. A mortgage, on the other hand, is a contractual agreement with a bank or credit union that lends money to purchase a new home.
Due to their nature, both the income from an annuity and the liability payments on a mortgage are consistent and predictable. Therefore, you can use the income from an annuity to cover your mortgage payments month after month.
While this can be an effective strategy, before signing any contracts, it’s important to fully understand the terms of an annuity to ensure it aligns with your financial plan. Annuities are complex financial products and can be limited in liquidity. As with any investment, it’s important to grasp the full scope of the product and consult with your financial advisor before making a purchase.
Worried About Your Retirement Savings?
Frequently Asked Questions About Using an Annuity to Pay a Mortgage
Yes, because a fixed or income annuity offers a consistent stream of income, coordinating annuity payments can be an excellent way to cover your monthly mortgage bill. However, it’s important to fully understand the annuity contract, including its relatively illiquid nature and any associated fees.
A monthly payout from a $50,000 life annuity with a 10-year period-certain guarantee for two joint owners aged 65 would provide approximately $267 each month. Most fixed annuities offer competitive rates of return that align with the prevailing interest rates on similar fixed-income products. In the current high-interest rate environment, many MYGAs are yielding annual returns of 5% to 6%.
Most annuities allow for withdrawals of up to 10% of the total annuity value until they are annuitized. However, it’s important to understand the full breakdown of an annuity, including surrender charges and withdrawal fees. An annuity is primarily used for providing a consistent stream of income. If the funds used to purchase the annuity might be needed for a future home purchase, it would be wise to reconsider the initial investment.
Still have questions?
Editor Norah Layne contributed to this article.
Secure Your Retirement