What an Annuity Is — and What This Calculator Models
An annuity is a contract with an insurance company built around a stream of payments. Money goes in
during the accumulation phase — a lump sum, a series of deposits, or both — and grows tax-deferred.
Later, at annuitization, the accumulated balance converts into a payout stream, often for life. This page
models the first phase only: given a starting principal, annual and/or monthly additions, a growth rate and a
number of years, it projects the balance month by month.
Monthly growth rate = (1 + annual rate)1/12 − 1 · defaults end at $175,533.38
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The engine runs monthly because real additions arrive monthly as often as annually. Converting the annual rate
to its effective monthly equivalent — about 0.4868% a month for a 6% year — means twelve months of growth compound
to exactly the rate you entered, never a hair more. Watch the first rows of the monthly schedule in the defaults:
the $20,000 principal and the first $10,000 annual addition land together at the start, and month 1 credits
$146.03 of return on that combined $30,000.
Annuity due vs. ordinary annuity: timing is money
The one toggle on this page moves every addition between the beginning and the end of its period.
Beginning-of-period additions (an annuity due) earn growth for one extra period each — each annual addition
effectively earns one extra year. End-of-period additions (an ordinary annuity, also called an immediate annuity
in this accumulation sense) wait. In the defaults the difference is $7,908.48: $175,533.38 beginning vs.
$167,624.90 end, on identical deposits. Nothing else changed — a clean demonstration that when money is
invested can matter almost as much as how much.
Fixed, variable and indexed annuities
Fixed annuities credit a declared rate — guaranteed for a year at a time in traditional contracts, or for a
whole term in a multi-year guaranteed annuity (MYGA), the annuity cousin of a CD. Variable annuities invest
in market sub-accounts instead: returns float, principal is not guaranteed, and fees are the highest of the family.
Indexed annuities split the difference — a guaranteed minimum plus a share of an index such as the S&P 500,
limited by a cap or participation rate, so a 15% index year might credit only 10%. A single "growth rate" input, like
the one above, fits the fixed case directly and approximates the others with an average return.
Immediate vs. deferred
An immediate annuity skips accumulation almost entirely: a lump sum converts to income starting within a
year, which makes it a retirement-income tool rather than a savings tool. A deferred annuity is what this
calculator describes — years of tax-deferred growth first, income later. The tax deferral is the draw, and it has no
annual contribution limit, which is why annuities often enter the picture only after IRA and 401(k) limits are
maxed out. The catch is access: earnings withdrawn before 59½ usually draw a 10% IRS penalty on top of income tax.
The honest ledger: pros and cons
On the plus side: tax-deferred compounding, no contribution ceiling, and — in the payout phase — the option of
income that cannot be outlived, which no savings account offers. On the minus side: fees and lock-in.
Surrender charges typically run for the first 5 to 9 years on a declining scale (an eight-year schedule might
charge 8% in year one, 7% in year two, and so on); variable annuities layer on mortality-and-expense fees of
roughly 0.40%–1.75% a year, administrative charges around 0.10%–0.30%, fund management fees, and optional rider
charges, while sales commissions across the industry range from about 1% on simple contracts to as high as 10% on
complex ones. Returns are correspondingly modest — fixed indexed annuities have averaged around 3.27% a year in
one widely cited study, bond-like rather than stock-like, because insurers invest mostly in fixed income. Most
contracts include a free-look window of roughly 10 to 30 days to cancel without a surrender charge. An annuity
can be the right tool for guaranteed lifetime income; as a pure growth vehicle, its costs deserve the scrutiny
this calculator's fee-free projection invites — run your real contract's fees as a lower growth rate to see
their true drag.
Rolling retirement money in
A 401(k) or IRA can be rolled into an annuity tax-free, creating a qualified annuity funded with pre-tax money —
a common way to bolt a guaranteed income floor onto an existing retirement account. The rollover must still be
reported on that year's tax return, only one IRA-to-IRA rollover is allowed per year, and an indirect rollover
must be completed within 60 days or the amount becomes taxable income. Our Retirement Calculator and 401K
Calculator model the accounts on the other side of that decision.
FAQ
Why does the monthly schedule show a $30,000 addition in month 1?
Because two things land at the start: the $20,000 starting principal and, in annuity-due mode, the first $10,000 annual addition. From month 13 onward the annual addition appears on its own at the head of each year.
Can I model a single lump sum with no additions?
Yes — set both additions to 0. The calculator then reduces to pure compounding: $20,000 at 6% for 10 years becomes $35,816.95, exactly 20,000 × 1.0610.
Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial advice. Annuity contracts vary; guarantees depend on the issuing insurer's claims-paying ability.