Annuity Calculator

Calculate annuity growth during accumulation or periodic payouts from a lump sum. Determine how much income an annuity can provide or how your investment will grow.

Annuity Details

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Compare annuity returns with a diversified investment portfolio. Many retirees achieve better results with a systematic withdrawal plan from invested assets than with annuity products, which often carry high fees.

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Understanding Annuities

An annuity is a contract between you and an insurance company designed to provide regular income, typically during retirement. There are two main phases: accumulation (building value) and distribution (receiving payments). Understanding both phases is essential for evaluating whether an annuity fits your financial plan.

During the accumulation phase, your money grows tax-deferred, similar to a retirement account. You can invest a lump sum, make periodic contributions, or both. The growth rate depends on whether you choose a fixed annuity (guaranteed rate) or variable annuity (market performance).

The payout phase converts your accumulated balance into a stream of income. Payments can be fixed for a set period (period certain), for your lifetime, or for the longer of a period or your lifetime. The payment amount depends on your balance, assumed interest rate, and payout duration.

While annuities provide valuable income certainty, they come with trade-offs including higher fees than typical investments, potential surrender charges for early withdrawal, less liquidity, and ordinary income tax treatment on gains rather than favorable capital gains rates.

Annuity Formulas

Present Value of Annuity (Payout)

PMT = PV × r / [1 - (1+r)-n]

Where:

PMT = Periodic payment amount

PV = Present value (lump sum / accumulated balance)

r = Periodic interest rate

n = Total number of payment periods

Example

For a $100,000 annuity at 6% with monthly payouts for 20 years:

  • • Monthly rate: 6% / 12 = 0.5%
  • • Total periods: 20 x 12 = 240
  • • Monthly payment: $100,000 x 0.005 / (1 - 1.005^-240) = $716.43
  • • Total received: $716.43 x 240 = $171,943
  • • Total interest earned during payout: $71,943

Frequently Asked Questions

What is an annuity?
An annuity is a financial product that provides regular payments over a specified period. During the accumulation phase, you invest money that grows tax-deferred. During the payout phase (annuitization), the insurer makes regular payments to you. Annuities can be fixed (guaranteed rate) or variable (market-linked).
What is the difference between accumulation and payout?
During accumulation, you are building the annuity value through initial investment and/or regular contributions. During payout (distribution), the annuity makes periodic payments to you from the accumulated balance, which continues earning returns on the remaining balance.
How are annuity payments calculated?
Payout amounts depend on the account balance, interest rate, payment frequency, and payout period. The formula ensures the balance is depleted evenly over the chosen period while the remaining balance continues earning interest, similar to a mortgage payment calculation in reverse.
Are annuities a good investment?
Annuities provide guaranteed income, which can be valuable for retirement planning. However, they often have high fees, surrender charges, and lower returns than market investments. They may be appropriate for risk-averse retirees who prioritize income certainty over growth potential.
What are the tax implications of annuities?
Annuity growth is tax-deferred during accumulation. During payout, the earnings portion of each payment is taxed as ordinary income (not capital gains). If purchased with after-tax money, you receive a portion of each payment tax-free as return of principal (exclusion ratio).