Annuity Calculator

General Annuity Information

An annuity is a contract, usually with an insurance company, that turns money you pay in into a stream of income later. You fund it with a single lump sum or a series of payments, the insurer invests the money and credits growth, and at some point you can convert the balance into regular payouts, often for the rest of your life. In that sense an annuity is the mirror image of life insurance: life insurance protects your family if you die early, while an annuity protects you if you live a long time and risk outliving your savings.

Most annuities have two phases. During the accumulation phase, your contributions grow tax-deferred: you owe no income tax on gains until you withdraw them. During the payout (or annuitization) phase, the insurer sends you payments for a fixed number of years or for life. This calculator models the accumulation phase; the annuity payout calculator handles the second.

In finance more broadly, an annuity is any series of equal payments at regular intervals, such as mortgage payments, bond coupons or regular deposits into savings. When the payments come at the end of each period it is called an ordinary annuity; when they come at the start, it is an annuity due, and each payment gets one extra period of growth. With the defaults, a $20,000 starting balance plus $10,000 added at the start of each year at 6% reaches $175,533.38 after 10 years; with additions at year-end it reaches $167,624.90.

Annuities are regulated mainly by state insurance departments, and variable annuities are also regulated as securities by the SEC and FINRA. Guarantees depend on the financial strength of the insurer, and state guaranty associations provide a limited backstop, often up to $250,000 in present value of annuity benefits, if an insurer fails.

FV = P(1 + r)ⁿ + A × [(1 + r)ⁿ − 1] ÷ r × (1 + r)

P

starting principal

A

addition each year

r

annual growth rate

n

years

The final (1 + r) factor applies when additions are made at the start of each year (annuity due). Drop it for additions at the end of each year.

Quick Pros and Cons of Annuities

Annuities can solve real problems, but they are complex and often expensive. A balanced view:

• Pro: guaranteed lifetime income. A life annuity pays as long as you live, which shifts longevity risk to the insurer.
• Pro: tax-deferred growth with no annual contribution limit. Unlike IRAs and 401(k)s, a non-qualified annuity can accept large sums once other tax-advantaged accounts are maxed out.
• Pro: optional protections. Riders can guarantee minimum income or death benefits, and fixed or indexed annuities shield principal from market losses.
• Pro: forced discipline. Money placed in an annuity is harder to spend impulsively.
• Con: fees. Variable annuities in particular stack mortality and expense charges, administrative fees, fund expenses and rider fees that can exceed 2–3% a year.
• Con: limited liquidity. Surrender charges commonly apply for six to ten years, and withdrawals before age 59½ can trigger a 10% IRS penalty on earnings.
• Con: gains are taxed as ordinary income, not at lower capital gains rates, and heirs do not receive a step-up in basis.
• Con: inflation. Fixed payments lose buying power over a long retirement unless you buy an inflation adjustment, which lowers the starting payment.
• Con: complexity. Contracts can run dozens of pages, and sales commissions can create conflicts of interest for the person recommending the product.

Fixed vs. Variable Annuities

The biggest distinction among annuities is how the balance grows. In a fixed annuity, the insurer guarantees a rate of interest for a set period, much like a certificate of deposit. A multi-year guaranteed annuity (MYGA) might lock in a rate for three, five or seven years. The insurer bears the investment risk, your principal does not fall with markets, and the result is easy to project with a calculator like this one. The trade-off is that returns are modest and may trail inflation.

In a variable annuity, your money goes into investment subaccounts, which are similar to mutual funds holding stocks, bonds or money market instruments. Your balance rises and falls with those investments, so growth is potentially higher but not guaranteed, and you can lose money. Variable annuities are securities, sold with a prospectus, and typically carry the highest fees. Many buyers add riders such as a guaranteed minimum withdrawal benefit, which promises a certain level of income regardless of market performance, at an added annual cost.

Fixed indexed annuities sit in between. Growth is linked to a market index such as the S&P 500, but subject to caps, participation rates or spreads that limit how much of the index gain you receive. In exchange, the contract usually guarantees you will not lose principal in a down year, often with a 0% floor. Indexed annuity crediting formulas are notoriously intricate, so it pays to read exactly how gains are calculated and how often the insurer can change the cap.

Which is better depends on the job you want the annuity to do. If you want certainty and simplicity, a fixed annuity fits. If you want market growth with tax deferral and are comfortable with costs and volatility, a low-cost variable annuity may work. If you want some upside without downside, an indexed annuity is designed for that, at the price of limited gains.

Whatever the type, compare the after-fee return to alternatives. A variable annuity earning 7% before 2.5% in annual fees grows like a 4.5% investment, and over 20 years the difference between 7% and 4.5% on $100,000 is roughly $146,000.

Immediate vs. Deferred Annuities

Annuities also differ by when payments begin. A single premium immediate annuity (SPIA) converts a lump sum into income that starts within a year, often within a month. Retirees use SPIAs to create a pension-like paycheck that covers essential expenses, alongside Social Security. Because there is no accumulation phase, an immediate annuity's value lies entirely in its payout rate, which depends on your age, interest rates and the payout option you choose.

A deferred annuity has an accumulation phase that can last years or decades before payments begin, and that is where the growth projected by this calculator happens. Deferred income annuities (sometimes called longevity annuities) let you pay now for income that starts much later, such as age 80 or 85. A qualifying longevity annuity contract (QLAC) bought inside an IRA or 401(k) can even postpone required minimum distributions on the amount used, up to a dollar limit set by the IRS.

Deferred annuities offer more flexibility, since you can often choose later whether to annuitize, take withdrawals or leave the money to heirs. Immediate annuities offer certainty but are generally irrevocable once purchased.

Surrendering an Annuity

Surrendering means cashing out the contract before its terms are complete. Most deferred annuities impose a surrender charge during the first several years, typically starting around 7% of the amount withdrawn and falling by about a point a year until it disappears. Many contracts allow penalty-free withdrawals of up to 10% of the value each year. Beyond the insurer's charge, the IRS taxes earnings as ordinary income, and, in most cases, adds a 10% penalty if you are younger than 59½. If you are unhappy with a contract, a tax-free 1035 exchange can move the money into a different annuity without triggering taxes, though a new surrender period may begin.

Annuity Fees

Fees are the most important thing to understand before buying an annuity, because they compound against you every year. The main charges are:

Commissions. Agents are commonly paid 1% to 7% or more of the premium. The commission is usually built into the contract rather than deducted from your deposit, and it is recovered through surrender charges and ongoing fees.

Mortality and expense (M&E) risk charges. Variable annuities typically charge around 1.25% a year to compensate the insurer for guarantees such as the death benefit.

Administrative fees. A flat annual fee, often $25 to $50, or a small percentage of the account value, sometimes waived for larger balances.

Investment management fees. The subaccounts in a variable annuity carry expense ratios like mutual funds, frequently 0.5% to 1% or more.

Rider fees. Optional benefits such as guaranteed lifetime withdrawals, enhanced death benefits or long-term care coverage commonly cost 0.25% to 1.5% each per year.

Fixed and indexed annuities usually do not list annual fees; instead, the insurer's costs are reflected in the rate it credits or the cap it sets. That makes them look cheaper than they may be, so compare their credited rates with Treasury yields or CDs of similar length. For variable annuities, add up all the charges and enter the after-fee return into this calculator to see the realistic outcome. Low-cost variable annuities sold directly by some fund companies and insurers charge a fraction of the industry average.

Rolling 401(k)s or IRAs Into Annuities

Retirement plan money can be moved into an annuity through a direct rollover, keeping its tax-deferred status. It can make sense in some cases and adds little in others:

• An IRA is already tax-deferred, so an annuity inside it adds no tax benefit; you pay for the annuity's other features.
• Converting part of a balance to an immediate or deferred income annuity can secure a floor of guaranteed lifetime income.
• A QLAC lets you use part of an IRA or 401(k) to buy deferred income and delay required distributions on that amount.
• Use a direct trustee-to-trustee transfer to avoid withholding and the 60-day rollover deadline.
• Compare fees with the low-cost index funds many 401(k) plans offer before moving the money.

Frequently asked questions

Sources

• Investor.gov – Introduction to Investing
• FINRA – Investor Insights
• IRS – Topic No. 410, Pensions and Annuities