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Are you curious about purchasing an annuity, and want to know ahead of time how much you can expect to receive? For many people, annuities can seem like an enticing retirement funding option. With regular payments and tax-deferred growth, annuities certainly have an appeal.
However, before you rush out to purchase one, it’s a good idea to know how much you might be able to earn with one. That way, you can make an informed decision about the best financial product for your situation — for example, some people choose to open an independent retirement account (IRA) or take out a reverse mortgage as alternatives to annuities when seeking retirement funding.
In this post, we’ll provide you with an annuity calculator that you can use to calculate the amount you’d be likely to earn by purchasing an annuity, and explain how to calculate an annuity. We’ll also discuss how annuities work, who purchases them, and their pros and cons.
What is an annuity?
Annuities are a contract that consumers can purchase through insurance companies. They allow consumers to contribute either a lump sum or installments in order to receive a lump sum or installments immediately or later, with interest applied. They are commonly used as a retirement funding product.
On the surface, annuities seem very similar to common retirement accounts, like an IRA or 401k. Both allow you to make regular contributions toward your retirement, can be tax deferred, and start paying out once you retire. However, annuities differ from retirement accounts in a few crucial ways:
- Annuities are insurance policies, not savings and investment products
- They often have higher fees than retirement accounts
- They also do not have many of the limits and restrictions of retirement accounts, such as annual contribution limits
Annuities may also have different policies, terms, and conditions depending on the insurance company they are purchased through, so be sure to explore those in depth before committing to a plan.
Annuity Calculator
Use the annuity payout calculator below to get an idea of the amount you may have access to in retirement if you purchase an annuity now.
First, tell us about your investment plan by filling in the fields below.
Starting Amount:
Starting Amount: The initial lump sum invested needed to produce the desired payments each period.
Length of Annuity in Years:
Length of Annuity in Years: The number of years the annuity will produce payments until depleted.
Withdrawal Frequency:
Withdrawal Frequency: The payment that the annuity will produce each period.
Annual Growth Rate:
Annual Growth Rate: The estimated yearly return on the initial lump sum invested, expressed as a percentage.
Compound Frequency:
Compound Frequency: The rate at which interest is compounded, such as daily, monthly, or annually.
One value must be left blank.
Fill in any 3 other boxes.
Withdrawal Amount cannot be more than Starting Amount.
Your Results: Please note, this calculator calculates ordinary annuity and not annuity due.
Based on input values:
Annuity Growth Over Time
Annuity Breakdown
Total Withdrawal
Remaining Balance
What can an annuity calculator tell you?
The price of your annuity can depend on a few different factors. Here’s how each of the variables in the calculator above factors into the annuity formula.
- Withdrawal amount: This is the amount that you plan on withdrawing at each installment. Note that annuities can be issued as a lump sum or as installments over a period of time.
- Withdrawal rate: Depending on your preference (and the offerings at your insurance company) you may be able to withdraw installments at a number of different rates; this might be monthly, quarterly, annually, or some other frequency.
- Principal amount: This is the amount that you pay for the annuity.
- Annual growth rate: What rate are you hoping to receive on your annuity? Note that this can be either fixed or varies, which will be discussed in more detail in the next section.
- Length of annuity (in years): The length of the annuity is the amount of time you expect the money to last before it is fully depleted.
The annuity payout calculator above can be used to figure out a number of different variables, provided you have each of the other variables listed above. So, if you want to know how long an annuity will last, you can provide information on the other four variables listed above. Alternatively, if you want to know how much you’ll be able to withdraw monthly, you can fill in the other four variables — and so on.
Note that the calculator above provides estimates of what you may be able to receive when withdrawing from your annuity (or the rate you may need, the principal you’ll have to pay, etc). The actual amount you receive may vary depending on factors like whether your annuity is fixed, variable, or indexed. It may also vary depending on the fees charged by the insurance company you work with.
In order to better understand the estimate you get from the calculator, it’s important to note that there are two different kinds of annuities.
Fixed vs variable annuities
A fixed annuity guarantees you a certain amount of interest when receiving withdrawals — currently, rates are between 1% – 3%. Fixed annuities represent a slow and steady approach. Rather than risking money in hopes of receiving a larger payout, consumers settle on a smaller rate knowing they are guaranteed to receive it.
On the other hand, variable annuities allow consumers to direct the money in their annuity toward different investment options. These might include mutual funds and ETFs, stocks, and bonds. They are called variable annuities because, as the name suggests, the rate that you receive varies. If the particular funds or securities that you are invested in perform well, you might be able to make a significant amount more than you would through a fixed annuity. If they do not perform well, you could potentially earn less.
A common variable annuity is an indexed annuity, which is invested widely across a market index. Similar to an index fund, which attempts to tap into the growth of the entire stock market (as represented by a particular market index), indexed annuities grow slowly but steadily over time as the market they are invested in grows.
Ordinary annuity vs annuity due
In addition to the difference between fixed and variable annuities, it’s also important to know about the difference between ordinary annuities and annuity due. Ordinary annuities have payments due at the end of each period, while annuity due means that your payment is due immediately at the beginning of each pay period. If the timing of your payment is important to you, be sure that you ask your insurance representative how they collect payments on annuity plans.
It’s always a good idea to speak with a professional financial advisor when deciding among options like fixed and variable annuities. Everyone’s time horizon, capital, and other financial factors vary, so getting a personalized recommendation is always wise. In fact, there may be other retirement financing options that work better for you than an annuity might.
Pros and cons of annuities
Like any financial product, annuities come with pros and cons that should be considered before you purchase one. First, let’s take a look at the pros and cons of annuities, then explain a little about how they compare with other, similar retirement funding products.
Pros
The advantages of annuities include:
- Secured source of retirement funds
- Potential for growth due to interest payments
- Deferred taxes only due upon withdrawal
- Fixed annuities guarantee a certain rate of return
Cons
The cons of annuities include:
- Annuities can be difficult for some consumers to fully understand
- Returns on withdrawals are taxed as income
- Annuities often charge high fees
- Annuities may offer lower interest rates than other forms of investing
How annuities compare
Some similar retirement funding options include 401ks, IRAs, and reverse mortgages. Depending on your specific financial situation, you may find that one option better suits you than another.
- 401ks are offered through employers, and allow employees to deposit a certain portion of each paycheck into their account. They earn interest over time by investing in stocks and bonds, like mutual funds, ETFs, and other low-risk investments. Traditional 401ks are tax-deferred, like annuities, so taxes are only collected once you start making withdrawals.
- IRAsare similar to 401ks in that they allow you to grow your money for retirement passively through various investing options. However, IRAs do not need to be opened through an employer; they are independent. IRAs are tax-deferred, but Roth IRAs allow you to invest after-tax income, so you won’t be taxed when you start making withdrawals.
- Reverse mortgages are a type of financial product that allows you to use the equity in your home to fund monthly payments. This can be a useful option for retirees with little or no savings but who do own property. However, note that using a reverse mortgage often means that heirs will be unable to inherit the home without paying off its worth to the loan company.
Annuities can be an effective way to fund retirement, but it’s important to understand your other options first. For many retirees, it might make more sense to open an IRA, or even take out a reverse mortgage, rather than pay the costly fees tied to annuities. Ultimately, it depends on your specific situation.
Annuity takeaways
Here’s what to remember about annuities:
- Annuities are a financial product purchased through an insurance company. Annuities slowly grow your money and then return it to you at a certain period, usually in retirement.
- You can use our annuity calculator to get a sense of the amount of money an annuity might be able to secure you. However, this is not a guarantee, and it’s a good idea to get a professional quote if you’re seriously considering annuities.
- Annuities can have fixed or variable interest rates. Fixed rates tend to be lower and guaranteed, while variable rates could be higher, but might be low under poor market conditions.
- Annuities can be compared to other retirement financial products like IRAs, 401ks, and reverse mortgages. Which works best for you depends on your retirement situation, so it’s always a good idea to seek professional investing advice if you’re unsure.
Sources: AARP | Investor.gov
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