Annuity Calculator

What the annuity calculator does

The annuity calculator projects the accumulation phase of an annuity contract — the period before you start drawing income. It compounds your starting principal at the growth rate you choose, adds your contributions on a monthly and annual cadence, and breaks the ending balance into three buckets: original principal, total additions, and total return. The companion annuity payout calculator models the opposite phase — turning that balance into a stream of income.

How it works — the future value formula

An annuity with periodic contributions is a textbook future-value problem. The calculator runs the math once per month so it correctly handles mixed monthly + annual additions. The closed-form expression for the future value of a level periodic payment is:

FV = P(1+r)^n + PMT × [((1+r)^n − 1) / r]

In MathML notation:

$$FV=P(1+r){}^n+PMT·\frac{(1+r){}^n-1}{r}$$

where P is the starting principal, PMT is the periodic contribution, r is the per-period rate, and n is the number of periods. For an annuity due (contributions at the beginning of each period) every term is multiplied by an extra (1 + r) because each payment earns one more period of growth.

Key concepts

Accumulation versus payout

An annuity has two distinct phases. During accumulation, money grows tax-deferred inside the contract — you owe no current tax on dividends, interest or capital gains. During payout (or annuitization, if you elect a guaranteed income stream) the insurer pays you back according to the option you choose: lump sum, fixed length, fixed payment, life only, joint and survivor, or life with period certain. This page covers accumulation; the annuity payout calculator handles the rest.

Tax deferral

Money inside a non-qualified annuity grows tax-deferred. You do not pay tax until you withdraw. When you eventually take income, gains come out first (LIFO ordering) and are taxed as ordinary income — not at the more favorable long-term capital-gains rate. That LIFO treatment is one of the biggest differences between an annuity and a brokerage account.

Surrender charges

Most deferred annuities lock your money for a 5-10 year surrender period. Withdraw more than the free-amount allowance (commonly 10% per year) and you owe a surrender charge. A typical 7-year schedule looks like 7-6-5-4-3-2-1%, falling to zero in year 8. Surrender charges stack on top of the IRS 10% early-withdrawal penalty if you are under age 59 1/2.

1035 exchange

Internal Revenue Code Section 1035 lets you swap one non-qualified annuity for another (or a life-insurance policy for an annuity) without triggering income tax. Partial 1035 exchanges are also allowed since 2003. The cost basis of the old contract carries over to the new one. A 1035 is useful when fees on an older contract have crept up and a newer product offers materially better terms — but always check that the new surrender clock and any new rider fees do not eat the savings.

Fixed, variable, and indexed annuities

Type	How it grows	Typical fees	Pros	Cons
Fixed	Insurer credits a stated interest rate, often guaranteed for 1-10 years	Lowest — fees are baked into the crediting rate	Predictable, CD-like, principal protected, simple	Low rate; renewal rate often drops; inflation risk
Variable	Sub-account mutual funds; value moves with markets	M&E 1.0-1.3%, admin 0.1-0.3%, sub-account 0.5-1.5%, riders 0.5-1.5% — often 2.5-3.5% total	Market upside; optional living-benefit riders; tax-deferred growth	Highest fees; downside risk; rider math is complex
Indexed	Interest credited based on an index (often S&P 500) subject to caps, participation rates and floors	Lower explicit fees than variable; cost buried in caps	Principal-protected, some upside, no negative years	Caps can be reset annually; opaque crediting methods; cap compression in low-rate environments
Immediate (SPIA)	Pays income starting within a year of premium	Built into the payout factor	Income now; longevity protection	Loss of access to principal; no liquidity
Deferred Income (DIA)	Pays income years in the future	Built into the payout factor	Longevity insurance; small premium buys large future income	Inflation risk on the payout side

Typical annuity fees

For a variable annuity, the all-in expense ratio is often 2.5-3.5% per year once you stack everything together:

• Mortality & expense (M&E): 1.0-1.3% per year — pays for the death benefit and insurer profit.
• Administrative fee: 0.1-0.3% per year — record keeping and contract maintenance.
• Sub-account expense ratios: 0.5-1.5% per year — equivalent to mutual-fund expense ratios.
• Rider charges: 0.5-1.5% per year — living-benefit guarantees like GLWB or GMIB.
• Commission: 4-7% of premium up front (paid by insurer but recouped via the surrender schedule).

When you enter a growth rate in this calculator, use a net-of-fee number. If a variable sub-account returns 8% gross and total fees are 3%, use 5%.

Worked example 1 — fixed annuity, monthly contributions

Maria, age 45, rolls $50,000 from an old IRA into a fixed deferred annuity crediting 5% per year. She also contributes $500 per month for 10 years (end of month). The calculator returns:

• Starting principal future value: 50,000 × (1.0041667)^120 ≈ $82,350
• Monthly contributions future value: 500 × [(1.0041667^120 − 1) / 0.0041667] ≈ $77,641
• End balance ≈ $159,991
• Total contributed: 50,000 + 500 × 120 = $110,000
• Total return: ≈ $49,991

Worked example 2 — variable annuity, mixed contributions

James, age 50, places a $100,000 1035 exchange into a variable annuity. He contributes $5,000 annually at year-end and $250 monthly. He assumes a 6% net-of-fee return for 15 years. End balance is roughly $401,000, of which $175,000 is contributions and $226,000 is return. If fees instead consumed an extra 1% per year (net 5%), the end balance falls to about $360,000 — a $41,000 reminder that fees compound too.

Edge cases

• Zero growth rate. The future-value formula divides by r, so the calculator switches to the simple FV = P + PMT × n when the rate is zero.
• Annuity due timing. Selecting "beginning of period" multiplies the contribution future value by (1 + r); over 30 years that is about 5-6% higher than ordinary timing at typical rates.
• Very long horizons. Contributions become a small fraction of the end balance after about 25 years because compounding dominates. If you cannot save the same amount for that long, lengthen the runway rather than guess a higher rate.
• Surrender period overlap. If the number of years here is shorter than the surrender period (often 7-10 years), the contract value shown is not what you can withdraw — subtract the applicable surrender percentage on anything beyond the free-amount window.
• Negative real return. A 3% fixed annuity in a 4% inflation environment loses purchasing power. The calculator shows nominal dollars; subtract expected inflation if you want today's-dollars buying power.

What to do with the result

1. Compare against a low-cost alternative. Plug the same principal, contributions and horizon into the investment calculator with a return that reflects a low-cost index fund. If the annuity does not win after fees, it has to win on the guarantee side.
2. Switch to the payout phase. Take the end balance, drop it into the annuity payout calculator and pick a payout option. That tells you how much retirement income you have actually bought.
3. Check the rollover trade-off. If your starting principal comes from a 401(k) or IRA, compare against keeping it in the 401(k) or IRA shell — same tax treatment, usually lower fees.
4. Coordinate with RMDs. Qualified annuities follow normal RMD rules; check the RMD calculator for your minimum at the current tax year.
5. Sanity-check overall retirement. The retirement calculator rolls multiple income streams (annuity, 401(k), Social Security) into a sustainable-withdrawal estimate.

Cross-links

For the payout side of the contract see the annuity payout calculator. For tax-advantaged alternatives see the IRA calculator, the 401(k) calculator, the retirement calculator and the RMD calculator.