Calculate annuity payments, present value, future value, and growth projections. Compare fixed and variable annuity options for retirement planning and income generation.
An annuity is a financial product that provides a steady stream of payments over a specified period or for life. Annuities are commonly used for retirement planning, offering guaranteed income and helping protect against the risk of outliving your savings.
There are various types of annuities with different features, payment options, and tax implications. Understanding how annuities work can help you make informed decisions about incorporating them into your retirement strategy.
PV = Present Value, PMT = Payment, r = Interest rate per period, n = Number of payments
Calculates the total value of all annuity payments at the end of the payment period
Calculates the payment amount based on present value and terms
| Annuity Type | Payment Start | Interest Rate | Best For |
|---|---|---|---|
| Immediate Fixed | Within 1 year | Fixed rate | Immediate income needs |
| Deferred Fixed | Future date | Fixed rate | Retirement planning |
| Immediate Variable | Within 1 year | Market-based | Growth potential with income |
| Deferred Variable | Future date | Market-based | Long-term growth |
| Option | Guaranteed Income | Growth Potential | Liquidity | Fees |
|---|---|---|---|---|
| Fixed Annuity | Yes | Low | Limited | Low-Medium |
| Variable Annuity | No | High | Limited | High |
| 401(k)/IRA | No | Medium-High | High | Low-Medium |
| Bonds | Yes | Low | High | Low |
| Dividend Stocks | No | High | High | Low |
| Feature | Fixed Annuity | Variable Annuity |
|---|---|---|
| Interest Rate | Guaranteed minimum rate | Based on investment performance |
| Payment Amount | Fixed, predictable | Variable, can fluctuate |
| Investment Risk | Insurer bears risk | You bear investment risk |
| Inflation Protection | Limited | Potential through growth |
| Fees | Lower | Higher (management fees) |
Part of each payment is tax-free return of principal
Funded with pre-tax dollars (401k, IRA rollover)
| Fee Type | Typical Range | Description |
|---|---|---|
| Management Fee | 0.5% - 2.0% | Annual fee for variable annuities |
| Mortality & Expense | 1.0% - 1.5% | Insurance cost and profit |
| Surrender Charges | 5% - 10% | Early withdrawal penalty |
| Administrative Fee | $25 - $50 | Annual account maintenance |
| Rider Fees | 0.25% - 1.0% | Optional benefit features |
Limited Liquidity: Early withdrawal penalties and surrender charges can be substantial.
High Fees: Variable annuities often have complex fee structures that reduce returns.
Inflation Risk: Fixed payments lose purchasing power over time due to inflation.
Opportunity Cost: Conservative returns may lag behind stock market performance.
Complexity: Product features and terms can be difficult to understand and compare.
| Alternative | Pros | Cons |
|---|---|---|
| Bond Ladders | Predictable income, liquidity | No longevity protection |
| Dividend Stocks | Growth potential, inflation protection | Income not guaranteed |
| TIPS | Inflation protection, government guarantee | Lower yields |
| Rental Property | Income + appreciation potential | Management required, illiquid |
Compare Rates: Shop multiple insurers as rates can vary significantly between companies.
Understand Fees: Read the prospectus carefully and calculate total annual costs.
Check Ratings: Choose insurers with high financial strength ratings (A+ or better).
Consider Timing: Interest rate environment affects annuity payouts significantly.
Review Riders: Evaluate optional features like inflation protection or death benefits.
$100,000 Immediate Annuity (Age 65): Approximately $500-600/month for life (varies by insurer and rates).
$500,000 Deferred Annuity (10 years): At 5% annual return, could provide $2,000-2,500/month starting at age 75.
Joint and Survivor (Both Age 65): Lower monthly payments but continues for both spouses' lifetimes.