Annuity or Dividends? The $875,000 401(k) Rollover Question, Answered With Real Numbers
Rolling over $875,000 from a 401(k) sounds like a finish line, but the choice you make in the next few weeks locks in how much income you collect for the rest of your life and what, if anything, your heirs…
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An $875,000 401(k) balance at retirement leaves you with one big decision. You can hand the money to an insurance company for a guaranteed lifetime check, or you can keep it invested and live off dividends. This article runs both options through the same equation by looking at the balance times yield equals income, and shows which one comes out ahead.
What $875,000 Buys From an Insurer
A single premium immediate annuity (SPIA) converts a single upfront payment into fixed monthly payments for life. At top carrier rates, a 65-year-old man should expect about $701 per month per $100,000. Scaled to the full rollover, that’s about $6,134 a month, or $73,605 a year. This means that the implied payout rate is roughly 8.4%.
That rate looks high because part of every check returns your own principal. Three costs come with the guarantee:
- Inflation: A basic SPIA payment stays flat. If inflation runs at an assumed 3%, $73,605 buys only what $40,753 buys today after 20 years. By comparison, Social Security gets a 3.6% COLA for 2027.
- Legacy: Payments on a life-only contract stop when you die. Your heirs receive nothing.
- Liquidity: Once you buy the annuity, you can’t get the $875,000 back.
Dividend Income at Three Yield Levels
When you keep the principal, your income equals $875,000 multiplied by the portfolio yield. The yields below are typical for each category:
| Tier | Typical Holdings | Math | Annual Income |
|---|---|---|---|
| Conservative (3.5%) | Dividend growth funds, broad dividend stocks | $875,000 x 0.035 | $30,625 |
| Moderate (6%) | Covered call ETFs, preferreds, REITs | $875,000 x 0.06 | $52,500 |
| Aggressive (10%) | BDCs, mortgage REITs, leveraged call-writing funds, high-yield bonds | $875,000 x 0.10 | $87,500 |
The conservative tier pays the least today, but its dividends and principal both tend to grow. The moderate tier pays more upfront, while writing calls against your holdings caps your upside and dividend growth slows. The aggressive tier beats the annuity on paper. Its funds often cut distributions, and their share prices can decline, so you may be spending down the asset much like an annuity, only without the insurer’s guarantee.
The 10-year Treasury yields 5.1%, which would pay $44,538 annually on the full balance with government backing. That figure works as a floor for comparing any riskier choice.
When Dividend Growth Passes the Annuity Check
Suppose the 3.5% portfolio raises its payout by 8% a year, a pace dividend growth strategies have managed over long periods. Income rises to about $61,220 by year 9 and $71,406 by year 11. In year 12 it reaches $77,119 and tops the annuity’s flat $73,605.
From that point on, the dividend investor collects more each year and still owns the principal. The annuity buyer owns nothing and will never see their payout rise. To match the annuity’s income on day one at a 3.5% yield, you would need $2,103,000.
The downside is the first 11 years, when the dividend portfolio pays less. Social Security will likely help cover that shortfall, as the average retired worker will receive $2,170 a month after the 2027 COLA.
Taxes Treat Both Options the Same Inside an IRA
In a rollover IRA, every withdrawal counts as ordinary income under 26 U.S.C. § 408(d)(1). That means the lower qualified dividend rate doesn’t apply. An annuity bought with IRA money is also fully taxable. For 2026, the 22% bracket starts above $50,400 for single filers ($100,800 for joint filers), and the 24% bracket starts above $105,700 ($211,400 joint). The aggressive tier’s $87,500, added to Social Security, can push a single filer into a higher bracket faster than the other tiers.
Three Moves Before You Sign Anything
- Ask the plan to send the funds straight to your IRA. When the plan pays you directly, the payer must withhold 20%, even if you plan to roll it into an IRA. Moving the money between custodians avoids that withholding entirely.
- Get annuity quotes for part of the balance. Add up your fixed costs, subtract Social Security, and get SPIA quotes only for the amount needed to cover the gap. Keep the rest in the conservative tier so it can compound and offset inflation.
- Plan for the first 11 years. If you choose dividends, map out how you will cover the gap before dividend growth tops the annuity. Then compare the 10-year total returns of a dividend growth fund and a 10% yield fund to see how much principal each one retained.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
