Annuity Calculator

Start by entering your Current Age and the Investment Amount you plan to use for the annuity.

Choose your Annuity Type: an Immediate Annuity begins paying right away, while a Deferred Annuity grows for a set period before payments start.

Select the Payout Type: Fixed for guaranteed payments, Variable for market-linked payments, or Fixed Indexed for returns tied to an index with a floor and cap.

Set your payout assumptions. Enter 0 for the Payout Period to model a life annuity (uses a mortality-adjusted annuity factor based on age). Enter a number like 20 for a period-certain annuity (pays for exactly that many years, then stops).

The advanced settings let you model split fees (M&E, admin, riders separately), COLA adjustments, inflation, surrender charges, and an alternative portfolio comparison with its own expense ratio.

Current Age & Investment Amount

Your age is used to calculate the mortality-adjusted annuity factor for life annuities — older annuitants receive higher payments because their expected remaining lifetime is shorter. The investment amount is the premium paid to the insurance company.

Annuity Type

• Immediate Annuity (SPIA): Lump sum in, payments start within a year. See our dedicated immediate annuity calculator.
• Deferred Annuity: Your money grows tax-deferred for the deferral period before payments begin. For indexed and variable types, the growth during deferral is simulated year-by-year using historical returns (not a flat average).

Payout Type

• Fixed: Guaranteed interest rate. Predictable payments. Conservative.
• Variable: Returns tied to market performance. Higher potential but more risk. Annual returns simulated using historical S&P 500 data (1994–2023).
• Fixed Indexed: Returns linked to a market index with a protective Floor and a Cap on gains. Credits are computed year-by-year against historical index returns — not as a simple midpoint of floor and cap.

Payout Period

• 0 = Life Annuity: Uses a Gompertz mortality model (US unisex, fit to SSA 2020 period life table) to compute a mortality-adjusted annuity factor. The payout is higher than a period-certain calculation for the same age because it includes "mortality credits" — the pooled benefit of risk sharing among annuitants.
• >0 = Period-Certain: Pays for exactly the specified number of years, then stops. No mortality adjustment.

Life Expectancy

When payout period is 0 (life annuity), this sets the projection display length for charts and tables. The annuity factor itself comes from the mortality model, not this input. When payout period is >0, this is used for comparison calculations.

Fee Breakdown (Advanced)

Annuity fees are split into three components:

• M&E Expense: Mortality & expense charge — covers the insurer's guarantee risk and profit margin. Typical: 0.5–1.5%.
• Admin Fee: Administrative/contract maintenance. Typical: 0.10–0.25%.
• Rider Charge: Cost for optional benefits like income riders (GLWB), death benefits, or nursing care riders. Typical: 0.25–1.0%.

The Portfolio Expense Ratio is the cost for the self-managed alternative (e.g., a low-cost index fund at 0.03–0.50%). The alternative comparison uses only this fee — it doesn't pay for the annuity's M&E or rider charges, making the comparison fair.

Surrender Charge

The starting penalty for early withdrawal, declining by 1 percentage point per year. A 7% starting charge over 7 years produces: 7%, 6%, 5%, 4%, 3%, 2%, 1%, 0%. Actual contract schedules may differ — check your specific contract.

Other Advanced Options

• COLA: Annual payout increase to offset inflation. Lowers the starting payment.
• Inflation Rate: Used to calculate real (purchasing power) value of future payments.
• Alternative Return: Expected annual return on a self-managed portfolio (before portfolio fee).
• Tax Rate: Your marginal income tax rate for the non-qualified annuity tax estimate.

Life Annuity Factor (Mortality-Based)

When the payout period is set to 0, the calculator computes a mortality-adjusted annuity factor using the Gompertz survival model:

1. For each future year t, compute the probability of surviving from the payout start age to age + t.
2. Weight each year's payment by the survival probability and discount it at the effective rate.
3. The sum of these weighted present values is the life annuity factor.

This produces a higher payout than a period-certain calculation because the insurance company pools mortality risk: annuitants who die earlier effectively subsidize those who live longer. This "mortality credit" is the fundamental value proposition of a life annuity.

The Gompertz parameters are fit to the SSA 2020 US period life table (unisex average). The model is a widely-used actuarial approximation — actual insurer quotes will vary based on their mortality assumptions, reserves, and profit margins.

Period-Certain Factor

When a fixed payout period is specified, the calculator uses the standard present value of a growing annuity formula — no mortality adjustment. The annuitant receives payments for exactly the specified number of years.

Indexed Credits (Year-by-Year, Not Midpoint)

For fixed indexed annuities, the calculator applies the cap and floor to each year of a 30-year historical S&P 500 total return series (1994–2023), rather than using the arithmetic midpoint of cap and floor.

With a typical 8% cap and 1% floor:

• In a year when the S&P returned 37.6%, the credited rate is 8% (cap)
• In a year when the S&P returned -37%, the credited rate is 1% (floor)
• In a year when the S&P returned 4.9%, the credited rate is 4.9% (between floor and cap)

The geometric average of these capped/floored credits gives a more realistic effective rate than the simple midpoint. During the deferral phase for deferred indexed annuities, the account value is grown year-by-year using these credits.

Variable Returns

Variable annuity accumulation uses the same historical S&P 500 return series (minus total annuity fees) to show realistic year-to-year variation during the deferral phase.

Exclusion Ratio with Basis Recovery

For non-qualified annuities (funded with after-tax money), the IRS exclusion ratio determines how much of each payment is a tax-free return of premium:

exclusion_ratio = investment_amount / total_expected_payouts
tax_free_per_year = annual_payout × exclusion_ratio

Crucially, the exclusion stops after basis recovery. The calculator tracks cumulative excluded amounts. Once the total tax-free portions received equal the original premium, all subsequent payments become fully taxable. The year-by-year table shows the tax-free and taxable split for each year, including the transition point.

For qualified annuities (funded from IRAs or 401(k)s), all payments are generally fully taxable from day one because the contributions were pre-tax.

Fair Alternative Comparison

The self-managed portfolio comparison uses only the portfolio expense ratio (not the annuity's M&E charge or rider costs), producing a fair apples-to-apples comparison. The annuity comparison includes all annuity fees.

Surrender Schedule

Surrender charges decline by 1 percentage point per year from the starting charge (e.g., 7%, 6%, 5%...), matching the most common contract structure. The surrender value table shows the net amount you'd receive if you cashed out in each year.

Gompertz Survival Model

hazard_rate(x) = a × exp(b × x)

survival_prob(start_age, t) = exp(-(a/b) × exp(b × start_age) × (exp(b×t) - 1))

Parameters (US unisex, SSA 2020):
  b = 0.0887
  mode = 87.25
  a = b / exp(b × mode)

Life Annuity Factor

life_factor = Σ (t=1 to 120-age) survival_prob(age, t) × (1+cola)^(t-1) / (1+rate)^t
annual_payout = accumulated_value / life_factor

Period-Certain Factor

period_factor = (1 - ((1+cola)/(1+rate))^years) / (rate - cola)
annual_payout = accumulated_value / period_factor

Indexed Credit (Per Year)

market_return = historical_sp500[year % 30]
credited_rate = max(floor, min(cap, market_return))

Exclusion Ratio with Basis Recovery

exclusion_ratio = investment / total_payouts
max_exclusion = investment (total basis)

Each year:
  base_excluded = payout × exclusion_ratio
  actual_excluded = min(base_excluded, max_exclusion - cumulative_excluded)
  taxable = payout - actual_excluded
  cumulative_excluded += actual_excluded

Effective Indexed Rate

product = Π (1 + max(floor, min(cap, historical_return[i])) / 100)
effective_rate = (product ^ (1/30) - 1) × 100

Immediate vs. Deferred

An Immediate Annuity (SPIA) starts payments almost right away. A Deferred Annuity has an accumulation phase where your money grows tax-deferred, then converts to an income stream later. For indexed and variable deferred annuities, this calculator simulates the accumulation using year-by-year historical returns, not a flat average.

Fixed, Variable, and Indexed

• Fixed Annuity: Guaranteed rate, predictable payments. Conservative but may not keep pace with inflation.
• Variable Annuity: Returns depend on sub-account investments. Higher growth potential but also higher risk and typically higher fees.
• Fixed Indexed Annuity: Returns linked to a market index with a floor (downside protection) and cap (upside limit). This calculator shows the actual year-by-year effect of the cap and floor against historical returns.

Life vs. Period-Certain

• Life Annuity: Pays as long as you live. Higher payout per dollar because of mortality credits. Risk: if you die early, the insurer keeps the remaining funds (unless you add a death benefit rider).
• Period-Certain: Pays for a fixed number of years. Lower payout per dollar but more predictable. Remaining payments go to beneficiaries if you die during the term.

Pros:

1. Guaranteed Income: Predictable income you cannot outlive (life annuity).
2. Longevity Protection: Mortality credits mean the insurer bears the risk of you living a very long time.
3. Tax-Deferred Growth: Earnings in a deferred annuity grow without annual taxation.
4. Simplicity: Hands-off income stream once established.

Cons:

1. Fees: Multiple layers (M&E, admin, riders) that can total 1–3% annually. This calculator breaks them out so you can see the full cost.
2. Illiquidity: Surrender charges penalize early withdrawal. Don't put money in an annuity that you might need for emergencies.
3. Lower Potential Returns: The floor/cap structure of indexed annuities limits upside. The historical average credit (shown in the calculator) is typically lower than uncapped market returns.
4. Inflation Risk: A fixed payment loses purchasing power. The "Today's Dollars" column in the year-by-year table shows this effect clearly.

A balanced approach often works best: use a portion of assets for annuity income to cover essential expenses, and keep the rest invested for growth. Explore this with a bucket strategy calculator.

• Monthly Income: The estimated payment you'll receive. For deferred annuities, a "today's dollars" equivalent is shown to put the future amount in current purchasing power terms.
• Total Payouts: Sum of all payments over the projection period. For life annuities, this is shown through your life expectancy — actual total depends on longevity.
• Break-Even Age: When cumulative payouts equal your investment. Living beyond this means the annuity has returned more than you paid in.
• After-Tax (Year 1): First-year after-tax income assuming non-qualified funding with the exclusion ratio active.
• Tax-Free vs Taxable columns: The year-by-year table shows when basis recovery completes and all payments become fully taxable.
• Annuity vs Self-Managed chart: The portfolio comparison uses only the portfolio expense ratio — not annuity-specific M&E or rider charges — for a fair comparison.
• Life vs Period-Certain label: Clearly shown in results and assumptions so you know which calculation method is being used.

1. Shop Around: Payout rates vary significantly between insurers.
2. Extend the Deferral Period: More accumulation years = higher future income. For indexed annuities, more years of cap/floor compounding.
3. Choose Period-Certain if You Have Heirs: Lower payout but guaranteed payments to beneficiaries.
4. Evaluate COLA vs. Level Payments: A COLA protects against inflation but lowers your starting income.
5. Ladder Annuities: Buy multiple smaller annuities over several years to diversify across rate environments.
6. Minimize Rider Charges: Only pay for riders you actually need. Each 0.25% rider fee reduces your net return.

1. Ignoring the Fee Structure: Total fees of 2–3% dramatically reduce net returns. Use the split fee inputs to see the impact of each component.
2. Using the Cap/Floor Midpoint as the Expected Return: The actual average indexed credit depends on the return distribution and is typically different from the midpoint. This calculator uses historical data instead.
3. Assuming the Exclusion Ratio Lasts Forever: Tax-free treatment of a portion of each payment ends after you've recovered your full basis. Later payments are fully taxable.
4. Comparing Annuity Returns to Gross Portfolio Returns: An annuity charges M&E and rider fees that a self-managed portfolio doesn't. Compare net of comparable fees only.
5. Underestimating Illiquidity: Surrender charges can lock up your money for 7+ years. Don't forget about healthcare costs in retirement.
6. Choosing the Wrong Payout Option: "Life only" stops at death. "Joint and survivor" continues for a spouse. Consider your specific situation.

An annuity can be a powerful tool for creating secure, predictable retirement income. Use the calculator above to explore your options — test life vs period-certain, fixed vs indexed, and different fee structures to understand the trade-offs.

For a comprehensive view of your financial future, see how this income fits with other sources using the retirement income calculator. Explore our full suite of retirement calculators and in-depth articles in the learn section to build a confident retirement plan.