Annuity Calculator
Calculate annuity payments from a lump sum, or find how much you need to invest for a desired income.
Quick Answer
An annuity converts a lump sum into a stream of equal payments. The payment formula is PMT = PV × [r(1+r)ⁿ] ÷ [(1+r)ⁿ−1], where PV is the lump sum, r is the periodic interest rate, and n is the number of periods. Annuities are regulated insurance products under state insurance departments and the SEC.
Also searched as: annuity, annuity calculator
Periodic Payment
$0
Total Paid Out
$0
Total Interest Earned
$0
How Annuities Work
An annuity is a financial contract between an individual and an insurance company that converts a lump sum into a stream of guaranteed periodic payments over a specified period or for life. According to the American Council of Life Insurers, total annuity reserves in the United States exceeded $3.1 trillion as of 2024, reflecting their central role in retirement income planning.
Annuities serve a specific purpose that other investments do not: they eliminate longevity risk, the possibility of outliving your money. Social Security provides a similar guaranteed income stream, but for most retirees it covers only 30-40% of pre-retirement income. Annuities bridge the gap by converting savings into predictable payments. This calculator uses the standard present value of an ordinary annuity formula to compute either the payment you can expect from a lump sum, or the lump sum you need to fund a desired payment. See also our retirement calculator and pension calculator to model your complete retirement income picture.
The Annuity Payment Formula
The periodic payment from an ordinary annuity is calculated using the present value of an annuity formula, a standard formula from financial mathematics:
PMT = PV × r / (1 − (1 + r)−n)
Where:
- PMT = periodic payment amount
- PV = present value (your lump sum investment)
- r = periodic interest rate (annual rate / payment frequency)
- n = total number of payments (years x payment frequency)
Worked example: You invest $250,000 at 5% annual interest with monthly payments over 20 years. The periodic rate r = 5% / 12 = 0.4167%, and n = 20 x 12 = 240 payments. PMT = $250,000 x 0.004167 / (1 - (1.004167)^-240) = $1,649.89 per month. Over 20 years, total payouts are $395,974, meaning you earn $145,974 in interest on your original $250,000 investment.
Key Annuity Terms You Should Know
- Immediate annuity: Payments begin within one year of purchase. Suited for retirees who need income right away.
- Deferred annuity: Payments begin at a future date, allowing the investment to grow tax-deferred during the accumulation phase.
- Surrender period: A window (typically 5-10 years) during which withdrawals beyond a certain percentage trigger surrender charges, often starting at 7% and declining annually.
- Exclusion ratio: The portion of each annuity payment that is considered a tax-free return of your original investment. Only the earnings portion is taxed as ordinary income.
- Annuitization: The process of converting your accumulated value into a stream of payments. Once annuitized, you generally cannot access the remaining lump sum.
Types of Annuities Compared
The annuity market offers several product types with different risk-return profiles. According to LIMRA, total US annuity sales reached a record $385 billion in 2024, with fixed annuities accounting for over 60% of sales.
| Type | Returns | Risk | Fees | Best For |
|---|---|---|---|---|
| Fixed | Guaranteed rate (3-6%) | Low | Low | Conservative savers |
| Variable | Market-linked (varies) | High | High (2-3%/yr) | Growth-oriented investors |
| Fixed Indexed | Index-linked with floor (0-10%) | Moderate | Moderate | Balanced risk tolerance |
| SPIA (Single Premium Immediate) | Fixed payment from day one | Low | Built into rate | Retirees needing immediate income |
Practical Annuity Examples
Example 1 -- Retiree seeking monthly income: Linda, age 65, invests $300,000 in a SPIA with a 5.2% payout rate. She receives $1,300 per month guaranteed for life. Over 25 years (to age 90), she collects $390,000 in total payments -- $90,000 more than her investment. If she lives past 90, she continues receiving payments, making this effective insurance against outliving her savings.
Example 2 -- Deferred annuity for future income: Tom, age 55, invests $200,000 in a deferred fixed annuity at 4.5%. After a 10-year deferral period, the account grows to approximately $311,000. He then annuitizes over 20 years for monthly payments of about $1,993. The deferral period allows compound growth to significantly increase his income stream.
Example 3 -- Pension vs annuity comparison: Carol is offered a $150,000 lump sum or $950/month for life from her pension. Using this calculator at 4% interest, $150,000 would generate $908/month over 20 years. The pension offers more per month with lifetime protection, making it the better choice unless Carol has health concerns or strong investment skills.
Tips for Buying an Annuity
- Compare quotes from multiple insurers: Payout rates can vary by 10-15% between companies for the same lump sum and age. Use comparison services or work with an independent broker.
- Check the insurer's financial strength: Annuity guarantees are only as strong as the company behind them. Look for A.M. Best ratings of A or higher, and consider splitting large purchases between two insurers.
- Understand surrender charges: Most deferred annuities impose charges of 5-10% for early withdrawals during the surrender period. Ensure you will not need the funds before the period ends.
- Consider inflation protection: A fixed annuity payment loses purchasing power over time. Some annuities offer inflation riders (at a reduced initial payment), or you can use a ladder strategy -- buying annuities at different ages to get higher rates as you age.
- Do not annuitize all your savings: Keep a liquid reserve for emergencies and unexpected expenses. Most advisors suggest annuitizing 25-50% of retirement savings and keeping the rest invested.
Frequently Asked Questions
What is an annuity and how does it work?
An annuity is a financial contract with an insurance company that converts a lump sum into a series of guaranteed periodic payments over a specified period or for life. You pay a premium (the lump sum), and the insurer invests it and pays you back in installments that include both principal return and interest earnings. For example, a $200,000 annuity at 5% over 20 years generates approximately $1,320 per month. Annuities are commonly used for retirement income because they eliminate the risk of outliving your savings, which is a concern for the roughly 50% of Americans who worry about retirement income, according to Gallup polling data.
What is the difference between fixed and variable annuities?
A fixed annuity guarantees a specific interest rate and predictable payment amount, making it similar to a CD but with longer terms and potentially higher rates. A variable annuity ties your payments to the performance of underlying investment sub-accounts (similar to mutual funds), offering higher growth potential but also the risk of lower payments if markets decline. Fixed indexed annuities provide a middle ground by linking returns to a market index (like the S&P 500) while guaranteeing a minimum return floor of 0-1%. Variable annuities typically carry annual fees of 2-3%, while fixed annuities generally have no explicit annual fees. For most retirees seeking predictable income, fixed annuities offer the best balance of simplicity and security.
Should I take an annuity or a lump sum from my pension?
The decision depends on several factors: your health and life expectancy, other income sources, investment skills, and need for income certainty. An annuity provides guaranteed lifetime income that protects against market downturns and longevity risk. A lump sum offers flexibility, control, and the ability to leave unused funds to heirs. Use the break-even analysis: calculate how many years of annuity payments equal the lump sum. If it is 15-18 years and you expect to live beyond that, the annuity is typically better. For a $200,000 lump sum versus $1,200/month annuity, the break-even is about 14 years. Many financial planners recommend a hybrid approach: annuitize enough to cover essential expenses and invest the remainder for growth and flexibility.
How are annuity payments taxed?
Taxation depends on how the annuity was funded. If purchased with pre-tax money (such as from a 401(k) or traditional IRA rollover), 100% of each payment is taxed as ordinary income. If purchased with after-tax dollars, only the earnings portion is taxed -- your original investment is returned tax-free through the exclusion ratio. For example, if you invested $200,000 and will receive $320,000 in total payments, 62.5% of each payment is a tax-free return of principal and 37.5% is taxable earnings. Annuities held inside qualified retirement accounts follow those accounts' tax rules. Early withdrawals before age 59.5 may also trigger a 10% IRS penalty on the taxable portion.
What is a good annuity rate in 2025-2026?
As of early 2026, fixed annuity rates range from approximately 4.5% to 6.0% depending on the term, insurer, and product type. Multi-year guaranteed annuities (MYGAs) with 3-5 year terms are offering 5.0-5.5%, while single premium immediate annuities (SPIAs) for a 65-year-old are generating payout rates around 6.5-7.5% (which includes return of principal). These rates have improved significantly from the sub-3% rates available in 2020-2021, driven by the Federal Reserve's interest rate increases. Compare annuity rates from multiple insurers and check their financial strength ratings before purchasing.
How much of my retirement savings should I put in an annuity?
Most financial advisors recommend annuitizing 25-50% of retirement savings to cover essential fixed expenses like housing, food, and healthcare. The remaining 50-75% should stay invested for growth, liquidity, and legacy goals. For example, if you have $500,000 in retirement savings and need $2,500/month beyond Social Security, you might annuitize $300,000 to generate approximately $1,800-2,000/month (depending on rates and age), and keep $200,000 invested in a diversified portfolio. This strategy provides a guaranteed income floor while maintaining flexibility for unexpected expenses, inflation adjustments, and estate planning.