Annuity Calculator
Calculate annuity payments and plan your retirement income
Last updated: January 2025
Annuity Details
Annuity Balance Over Time
Financial Summary
Understanding Annuities
An annuity provides guaranteed income for a specified period or lifetime. Immediate annuities start paying right away, while deferred annuities grow tax-deferred until payout begins. Fixed annuities offer predictable payments, making them popular for retirement planning.
Understanding Annuities
Types of Annuities (Fixed, Variable, Indexed)
There are three main types of annuities. A fixed annuity guarantees a set interest rate and predictable payments, making it the lowest-risk option. A variable annuity invests your money in sub-accounts similar to mutual funds, offering higher growth potential but exposing you to market risk. An indexed annuity (also called a fixed-indexed annuity) ties returns to a market index like the S&P 500, offering a guaranteed minimum return with the potential for higher gains when the market performs well.
Accumulation vs Payout Phase
Annuities have two distinct phases. During the accumulation phase, you contribute money and it grows tax-deferred. This phase can last for years with a deferred annuity, or it may be skipped entirely with an immediate annuity. The payout phase (also called annuitization) is when you begin receiving regular income payments. With an immediate annuity, payments start within a year of your lump-sum investment. With a deferred annuity, you choose when to begin receiving income.
Tax-Deferred Growth
One of the key benefits of annuities is tax-deferred growth. You do not pay taxes on interest, dividends, or capital gains while your money remains in the annuity. This allows your investment to compound faster than a taxable account. When you eventually withdraw funds, the earnings portion is taxed as ordinary income. If you purchased the annuity with after-tax dollars (non-qualified), only the earnings are taxed. If it is within a qualified plan like an IRA, the entire withdrawal is taxable.
Surrender Charges and Fees
Most annuities come with a surrender period, typically 5 to 10 years, during which early withdrawals trigger a surrender charge. This charge often starts at 7-10% and decreases each year until it reaches zero. In addition, variable annuities carry ongoing fees including mortality and expense charges (typically 1-1.5%), administrative fees, and underlying fund expenses. These fees can significantly impact your long-term returns, so it is essential to understand the full fee structure before purchasing.
Pros and Cons
Annuities offer several advantages: guaranteed income for life (or a set period), tax-deferred growth, no contribution limits (unlike IRAs), and protection from outliving your money. However, they also have drawbacks: high fees (especially variable annuities), limited liquidity due to surrender charges, earnings taxed as ordinary income rather than capital gains rates, and complexity that can make comparison shopping difficult. Annuities work best as one component of a diversified retirement strategy.
Frequently Asked Questions
What is an annuity?
An annuity is an insurance contract that provides guaranteed income payments, typically used for retirement. You pay a lump sum or series of payments to an insurance company, and in return receive regular payments for a set period or for life.
What is the difference between fixed and variable annuities?
A fixed annuity offers a guaranteed interest rate and predictable payments. A variable annuity is invested in sub-accounts (similar to mutual funds) where returns fluctuate with market performance, offering higher potential returns but also more risk.
Are annuity contributions tax-deductible?
Contributions to non-qualified annuities (purchased with after-tax dollars) are not tax-deductible. However, earnings grow tax-deferred until withdrawal. Annuities within qualified plans like a 401(k) or IRA follow the tax rules of that plan.
What is a surrender period and surrender charge?
A surrender period is a set number of years (typically 5-10) during which withdrawing more than the allowed amount from an annuity triggers a surrender charge — a penalty fee that starts high (often 7-10%) and decreases each year until it reaches zero. Always understand the surrender schedule before purchasing.
Can I lose money in an annuity?
With a fixed annuity, your principal is protected by the insurance company — you cannot lose money due to market performance. With a variable annuity, your account value fluctuates with the market and you can lose money. Indexed annuities offer a middle ground with a guaranteed minimum return and upside tied to a market index.