Annuity Calculator

An annuity is an insurance product that converts a lump sum or series of payments into a guaranteed income stream, typically for life. You pay the insurance company a premium, and in return it promises regular payments that can start immediately or at a future date. Annuities come in fixed, variable, and indexed forms, and some include income riders that guarantee a minimum payout. They are often used to cover essential expenses in retirement, but they come with fees, surrender charges, and reduced liquidity that vary by product.

A fixed annuity pays a guaranteed rate of return and predictable income, making it a low-risk option for conservative investors. A variable annuity invests in subaccounts tied to the stock market, so payments can grow but also fall with investment performance. Indexed annuities fall in between, crediting returns linked to a market index with a floor. Fixed annuities suit people who want guaranteed income and no market exposure, while variable annuities fit those seeking growth and willing to accept risk. Compare fees, riders, and surrender terms carefully.

Annuity fees can be substantial and include mortality and expense charges, administrative fees, investment management fees, and optional rider costs, which together can total 1 to 3 percent per year. Variable annuities also charge subaccount expenses, and surrendering within the first several years can trigger surrender charges of up to 8 to 10 percent that decline over time. Some indexed annuities cap returns or participation rates instead of charging explicit fees. These costs reduce your returns, so always read the fee disclosure and compare the annuity to low-cost alternatives like index funds.

Annuities can be a good fit for turning a lump sum into guaranteed lifetime income, especially for covering fixed expenses such as housing and food. However, they are not always the best investment because of high fees, limited liquidity, and modest long-run returns compared with a diversified stock portfolio. A common strategy is to use a portion of savings to buy a fixed income annuity for guaranteed cash flow while keeping the rest invested. Consider an annuity only after funding tax-advantaged accounts and comparing fees.

Annuities grow tax-deferred, meaning you pay no taxes on earnings until you withdraw them, and withdrawals are taxed as ordinary income. Payments from a non-qualified annuity are split into a tax-free return of your cost basis and taxable earnings under the exclusion ratio. Withdrawing money before age 59 1/2 generally triggers a 10 percent IRS penalty on top of income tax. Buying an annuity inside an IRA offers no additional tax benefit because IRAs are already tax-deferred, so most advisors recommend keeping annuities outside retirement accounts.

What happens at death depends on the payout option you chose. With a life-only option, payments stop when you die, leaving nothing to heirs. Joint-and-survivor options continue payments to a surviving spouse, usually at 50 to 100 percent of the original amount. Period-certain and cash-refund options guarantee either payments for a set number of years or a refund of the unused premium to beneficiaries. Variable and deferred annuities typically pass a death benefit to beneficiaries, but it may be subject to income tax.

An income rider is an optional feature, typically on a deferred annuity, that guarantees a minimum withdrawal amount for life regardless of how the underlying investments perform. A common example is a guaranteed lifetime withdrawal benefit, or GLWB, which bases withdrawals on a benefit base that may grow at a guaranteed rate, rather than your actual account value. Riders add annual fees of roughly 0.5 to 1.25 percent and have complex rules about when income can start and how much you can withdraw, so read the contract terms closely.