An annuity is a contract between you and an insurance company. You pay a lump sum (premium) upfront or over time, and the insurer agrees to pay you a stream of income — either immediately (immediate annuity) or beginning at a future date (deferred annuity). Payouts can last for a fixed period (e.g. 20 years) or for life. Annuities are the only financial product that can guarantee income you can't outlive, making them useful for retirement planning.

What is the difference between an immediate and deferred annuity?

An immediate annuity starts payouts within 12 months of purchase — you hand over a lump sum and begin receiving monthly checks right away. A deferred annuity has two phases: an accumulation phase where your principal grows tax-deferred for a set number of years (the deferral period), followed by a payout phase. Deferral allows the principal to compound, resulting in larger eventual payouts. Deferred annuities suit pre-retirees; immediate annuities suit those already needing income.

How is the annuity payout calculated?

For a fixed-period annuity, the monthly payment is calculated using the loan amortization formula: PMT = PV × i / (1 − (1 + i)^−n), where PV is the balance at payout start, i = annual rate / 12, and n = payout years × 12. The insurer credits a guaranteed rate during both deferral and payout. For life-contingent annuities, the payout also factors in mortality credits (the insurer pays more because some annuitants die early, leaving residual funds).

Are annuity payouts taxed?

Taxation depends on whether the annuity was purchased with pre-tax (qualified) or after-tax (non-qualified) money. Qualified annuities (funded with IRA/401k money) are fully taxable as ordinary income. Non-qualified annuities use the exclusion ratio: a portion of each payment is a tax-free return of principal, and the rest is taxable earnings. Once principal is fully recovered, all subsequent payments are taxable. The tax-deferred growth during accumulation is a key benefit of non-qualified annuities.

What happens to an annuity when you die?

It depends on the payout option. Life-only annuities stop at death — no residual goes to heirs. Life with period certain (e.g. life with 10-year certain) pays your beneficiary for the remainder of the certain period if you die early. Period certain annuities (e.g. 20-year certain) pay for the full term to your beneficiary if you die. Joint-and-survivor annuities continue paying a spouse (often 50%–100%) after your death. Refund annuities return unused principal to beneficiaries. More generous death benefits mean lower monthly payouts.

What is a good annuity rate in 2026?

Fixed annuities typically credit 3%–5% in 2026, depending on the term and insurer. Multi-year guarantee annuities (MYGAs) — the closest analog to CDs — often offer the highest guaranteed rates. Payout rates (annual payment / principal) for immediate annuities range from ~5% at age 60 to ~8%+ at age 75, reflecting mortality credits. Compare quotes from multiple A-rated insurers; rates vary meaningfully. Avoid annuities with high fees or complex riders unless you understand them.

Should I buy an annuity for retirement?

Annuities make sense if you want guaranteed lifetime income and have already maxed out tax-advantaged accounts (401k, IRA). They're especially valuable for covering essential expenses in retirement alongside Social Security. However, annuities are illiquid (surrender charges during deferral), fees can be high on variable/indexed products, and inflation erodes fixed payouts over time. Consider a deferred income annuity (DIA) or QLAC (qualified longevity annuity contract) for late-life income, and keep an emergency fund outside the annuity.

What is the difference between fixed, indexed, and variable annuities?

Fixed annuities credit a guaranteed rate (3%–5%) set by the insurer — lowest risk, lowest return. Indexed annuities tie returns to a market index (e.g. S&P 500) with a floor and cap — moderate risk, moderate return, but complex fees and caps often limit upside. Variable annuities invest in mutual fund subaccounts — highest risk, highest potential return, with fees of 2%–3%+ annually. For most buyers, a simple fixed annuity or MYGA offers the best value; avoid variable/indexed products unless you fully understand the fees.

Annuity Calculator

An annuity calculator is a free online tool that projects your monthly and total payouts from a fixed annuity. It supports both immediate and deferred annuities, showing balance growth, payout income, and a comparison against your original principal. Free, no sign-up required.

Annuity Details

Principal?Enter your principal.

Annual Interest Rate?Enter your annual interest rate.

Payout Period?Enter your payout period.

Deferral Period?Enter your deferral period.

End of inputs

Your Annuity Projection

Monthly Payment

$1,055.67

For 25 years

Annual Payment

$12,668.04

6.33% of principal

Total Payout

$316,701.00

Over 25 years

Balance at Payout

$200,000.00

No deferral

Deferral Growth

$0.00

No deferral

Payout Type

Immediate

Starts immediately

Principal: $200,000.00. Rate: 4.00%. Payout: 25 years. Deferral: 0 years. Monthly: $1,055.67. Total payout: $316,701.00 (no deferral).

Balance & Cumulative Payout Over Time

Principal vs Balance at Payout vs Total Payout

Key Insights

Your 25-year payout period is long — approaching a lifetime payout horizon. Longer terms mean smaller monthly payments because the principal is spread thinner. If you want lifetime income, consider a life-only or life-with-period-certain annuity rather than a fixed-period contract.

This is an immediate annuity: payouts begin right away on the full $200,000.00. Immediate annuities convert a lump sum into a guaranteed monthly income stream — useful at retirement when you need income now. You trade liquidity for lifetime (or fixed-period) income.

Your annual payout of $12,668.04 is 6.33% of principal — a moderate payout rate typical of 15–25 year fixed payouts. Compare to the 4% safe withdrawal rate used for invested portfolios: annuities can pay more because they consume principal, not just returns.

Your 4.00% credited rate is moderate — typical of fixed annuities. Shop around: MYGAs and indexed annuities can offer higher effective rates. Variable annuities have market-linked returns but no guaranteed rate.

No deferral period — payouts start immediately. Adding a deferral period would let the principal grow tax-deferred before payouts begin, increasing the eventual monthly payment. Consider deferral if you don't need income right away.

Guide

How to Use This Calculator

1Enter your principal — the lump sum you'll pay the insurer for the annuity.
2Set the annual interest rate. Fixed annuities typically credit 3%–5%; this rate applies during both deferral and payout.
3Choose the payout period. A 20–25 year payout is common; longer terms mean smaller monthly payments but more total income.
4Set the deferral period. 0 = immediate annuity (payouts start now); >0 = deferred annuity (principal grows first, then payouts begin).
5Review the monthly payment, annual payment, and total payout in the result panel. The balance chart shows growth during deferral and drawdown during payout.
6Compare principal vs balance at payout start to see how deferral compounds your money before payouts begin.
7Use the AI insights to assess payout adequacy, deferral benefit, rate competitiveness, and payout horizon fit.

Formula

How It's Calculated

Balance at payout start (after deferral):

  B = P × (1 + r)^startYears

  where P = principal, r = annual rate, startYears = deferral period.

Monthly payout (amortization over payout period):

  PMT = B × i / (1 − (1 + i)^−n)

  where i = r/12 (monthly rate), n = years × 12 (total payout months).

Total payout:

  Total = PMT × n

Example: $200,000 principal, 4% rate, 25-year payout, 10-year deferral.
- Balance at payout start = $200,000 × 1.04^10 ≈ $296,049
- Monthly payment = $296,049 × (0.04/12) / (1 − (1+0.04/12)^−300) ≈ $1,565
- Total payout over 25 years ≈ $469,500

For an immediate annuity (0 deferral), balance = principal and payouts
begin right away. Life-contingent annuities pay more than fixed-period
because mortality credits supplement the interest rate.

Glossary

Key Terms

FAQ

Frequently Asked Questions

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