Annuity Calculator

Use our annuity calculator to calculate the future value, present value, or payout of an annuity.

By

Andrew Paniello

Andrew holds a Bachelor's degree in Finance and a Bachelor's degree in Political Science from the University of Colorado and specializes in finance, real estate, and life insurance.

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Reviewed by

Laura Deimling, MBA

Laura started her career in Finance a decade ago and provides strategic financial management consulting. She has an MBA in Finance and a Bachelor's in Economics.

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What is an Annuity?

Annuities can be a valuable financial asset for retirement planning and establishing future sources of cash flow. Annuities are very commonly used in life insurance, retirement planning, and investment sectors.

As we will explain in this guide, there are many different types of annuities available. We encourage anyone who is interested in annuities to explore several options before making a final investment decision.

An annuity is a financial contract that promises to make future payments to the annuity holder. With many annuities, the investor will make a payment (or stream of payments) upon signing the contract in exchange for receiving a predetermined stream of payouts in the future.

Annuities provide a much greater degree of future predictability than their more speculative counterparts (stocks, real estate, etc.), making it easier for the investor to know when they will be paid and how much they will receive.

Annuities are popular investment vehicles because they are predictable, can offer higher rates of return than alternative fixed-return assets (savings accounts, CDs), and are usually backed by reliable institutions (e.g., life insurance companies).

Currently, it is estimated that the total value of all retirement annuities in the United States is approximately $2.5 trillion.^[1]

What are the Different Types of Annuities?

The term “annuity” is often used rather broadly within the financial and investment communities, which can create a bit of confusion for consumers. There are several different types of assets you might hear referred to as an annuity.

If you understand the different types of annuities, it will make it easier to determine which one is right for you. Let’s take a look at a few of the common annuity classes:

Fixed Annuities

Fixed annuities are among the most predictable and common type of annuity. With a fixed annuity, the owner of the annuity (sometimes referred to as the annuitant) will make either a large lump sum contribution to their annuity or make periodic contributions over time.

Once the contribution (accumulation) phase is completed, they will receive a fixed rate of return on these contributions.

For example, suppose the owner of a fixed annuity contributes $100,000 and the annuity offers a fixed three percent rate of return. As soon as the payout phase begins, the owner will then be entitled to a $3,000 payment made every year.

With a fixed annuity, there is no need to speculate where the markets might be moving—the $3,000 payment remains the same, no matter what.

Variable Annuities

Variable annuities are similar to fixed annuities—the annuitant pays in during the accumulation period with the promise of receiving periodic cash flows in the future.

However, in comparison to their fixed counterparts, the interest rate (and therefore the payment) offered by a variable annuity can change over time.

With an ordinary variable annuity, the owner will be able to choose which securities they are indirectly invested in. Usually, this means variable annuities will pay out more when markets are thriving and less when markets are weak.

The primary benefit of investing in a variable annuity is that investors can potentially receive a much greater payment (on average, variable annuities do pay more). However, there will also likely be years where the annuitant receives lower payments, meaning that these particular annuities create exposure to the risk of uncertainty.

Indexed Annuities

Indexed annuities are a class of annuities that determine their payouts based on a pre-selected market index. Rather than having the annuity holder choose their own securities, which is how variable annuities typically work, an indexed annuity’s payouts will be determined by a somewhat fixed bundle.

For example, an indexed annuity might use the Dow Jones Index or the S&P 500 Index, which are bundles of the nation’s largest publicly traded companies that typically reflect the growth (or decline) of the economy as a whole.

Immediate Annuities

With most annuities, there is typically a gap between when the annuitant begins paying into their annuity and when they begin receiving payments, which is why annuities are often a popular component of retirement planning.

But with an immediate annuity, the annuity holder will simply make a large lump sum payment and will then begin receiving payments almost immediately. These types of annuities are often popular among people who have just retired but have not invested in annuities in the past.

Deferred Annuities

A deferred annuity is the opposite of an immediate annuity—rather than making payments immediately, deferred annuities will make payments at some predetermined date in the future. The broad term “deferred annuity” can apply to both single lump sum payments or continual cash streams.

As you have probably noticed, there is quite a bit of overlap between these different categories. It is possible for more than one of these terms to apply to a single annuities contract.

For example, a deferred variable annuity will begin making payments at a future point in time (deferred) and will also have a flexible payout rate (variable). In order to properly classify an annuity, all you need to know is when you will get paid and how that payment amount will be determined.

How to Calculate Annuity Payments

In order to determine whether an investment in a given annuity will be beneficial, you will need to learn how to calculate the present value of an annuity. Additionally, knowing how to calculate the future value of an annuity will be advantageous for anyone who wants to achieve a variety of financial goals.

For example, if you want to receive a $10,000 annual payment starting 10 years from now, how much would you need to invest today?

If you know how to use an annuity calculator and know how annuities work, you’ll be able to answer this question and others. We discuss below important issues to be aware of, the different kinds of annuities, and the various formulas you may need to use.

Identifying the present and future values of an annuity can help you determine whether or not an annuity investment is a good choice for you.

The present value of an annuity is how much that annuity is worth right now, assuming a specific rate of return (also known as the “discount rate”). The future value of an annuity, which also assumes a specific discount rate, represents how much that annuity will be worth in the future.

It is only possible to calculate with certainty the value of a fixed-rate annuity. By definition, the payments made by variable annuities and indexed annuities can potentially change over time. But let’s take a look at how the future and present values of these annuities are typically calculated.

How to Calculate the Future Value of an Annuity

The best way to calculate the future value of an annuity is to simply use a future value of annuity calculator. However, knowing how the math works can help you get a better understanding of what this “value” actually means.

Determining the value of interest, which can be calculated with a compound interest calculator or an ordinary interest calculator, can also be helpful. To calculate the future value of an annuity, all you need to know is the payment amount and the interest rate. Then, you can use this formula:

Annuity Future Value Formula

Where:
FV = future value of an ordinary annuity
PMT = payment amount
i = interest rate

How to Calculate the Present Value of an Annuity

Similarly, calculating the present value of an annuity will be easiest when you use a present value of annuity calculator. To make this calculation, you’ll simply need the payment amount and the interest rate. The present value of an annuity indicates how much that annuity should be worth today, which can be calculated using the formula below:

Annuity Present Value Formula

Where:
PV = present value of an ordinary annuity
PMT = payment amount
i = interest rate

Note: You might also consider using a PVIFA calculator to calculate the present value interest factor of an annuity.

Calculating Annuity Payouts

In addition to calculating the present and future values, you will also have the ability to calculate the value of the annuity payout. This formula is logarithmic, which is why an annuity payment calculator can be helpful.

Annuity Payout Formula

In order to calculate the payout, you will need to know the principal, the number of periods, as well as the interest rate, along with the annuity payout formula.

Where:
P = principal
PMT = payment amount
i = interest rate
n = number of periods

How to Account for Annuity Fees

The three formulas above offer a simplified way to calculate the values of an annuity. However, these formulas do not account for fees applied to annuities.

These fees can come in several different forms, including initial underwriting fees, management fees, as well as potential penalties for withdrawing too early (some annuities, like other retirement assets, will require you to wait until you are 59 ½).

Whether the fees are bundled upfront or will be applied over time will depend on the policies of the company issuing the annuity. You should read the fine print on any contract for an underwritten or direct sold annuity.

How to Account for Taxes

Annuities are taxable, however, the growth of the annuity is tax-deferred so you won’t pay any taxes on your annuity until you begin receiving payments. Annuities are taxed as income, not capital gains, which you should be aware of when you start receiving annuity payments.

If you receive the annuity as a lump sum payment, that could push you into a higher tax bracket and increase your total tax bill. Most financial advisors will recommend spreading annuity payments over time.

Benefits of Annuities

Annuities have many benefits, which is why millions of households invest in them every year. Receiving a secure stream of income can make it easier to plan for retirement. Also, fixed-rate annuities allow you to predict when you will receive payments and how much each payment will be.

Because the growth of an annuity is tax-deferred, you will not need to worry about paying taxes on these annuities until later. If you continue making contributions, you can increase the value of your annuity.

When compared to highly speculative investments, like stocks, annuities are considered relatively secure (and if you’re more risk-tolerant, you could always consider variable annuities).

When to Use an Annuity

Several different factors will determine if investing in an annuity is a good decision for you. First, you should consider the type of annuity you want to invest in. An immediate annuity, for example, will begin making payouts right away but will allow for less room for growth.

On the other hand, a deferred annuity will have more time to accumulate value but that means you won’t be able to access your money until the future (probably retirement).

Annuities are ideal for people who are relatively risk-averse, are hoping to diversify their retirement plan, and want to establish a future stream of income. If you believe this describes your current investor profile, then investing in an annuity might be a good idea for you.