Annuity Calculator: Estimate Your Retirement Income
Annuities are just one of many choices you have when it comes to products that can help you accomplish your financial goals. To decide whether an annuity is right for you, you need to understand what annuities are and how they work. You also need to do some analysis to see how an annuity might fit into your plan.
This article provides background for understanding annuities and includes a calculator that lets you quickly estimate how much you might need to invest to get the payout you want.
How to Use the Annuity Calculator: Step-by-Step Guide
This annuity calculator can estimate what you could receive from an annuity based on the amount you contribute and the payout period. Here’s how to use it:
- Step 1: Input your initial investment amount in the “Starting Principal” box.
- Step 2: Select the payment interval, typically monthly.
- Step 3: Enter the interest rate or expected return in the “Annual Growth Rate” box.
- Step 4: In the box labeled “Length of Annuity in Years,” enter the number of years you expect the annuity to pay.
- Step 5: Review results for payout estimates and total returns.
Discover and Compare Investment Platforms
Explore several of the best retirement investment platforms, including annuities, using our list below.
What Are Annuities?
Annuities are a type of insurance product whose primary purpose is to provide you with a payment stream for a secure source of guaranteed income. You may be able to purchase an annuity with a single payment or make regular payments over time. Much like a savings or investment account, annuities can grow over time.
Although key features are common among all annuities, they are not all the same. Because they are contracts between the purchaser and issuer, details of each can also differ from one issuer to another or based on the specific contract provisions the individual pays for.
Why Use an Annuity Calculator?
An annuity calculator can help you understand how an annuity might fit into your financial plan. That’s because you can use it to get a quick estimate of how much you may need to invest in an annuity in order to get the payments you’re looking for. If you already know the dollar amount you plan to invest, it allows you to see how much your payments might be for that amount.
While you’ll need to get a quote from an insurer to get exact amounts or incorporate specific provisions, an annuity calculator can give you a pretty accurate approximation without the hassle. This allows you to check several factors quickly to better understand what you want before involving an insurance company.
How Do Annuities Work?
To understand how annuities work, you need to begin by separating them into two distinct phases.
There’s an accumulation period during which your annuity may grow in value, and then the decumulation period during which you are receiving payouts from the annuity.
The different types of annuities vary in how (or whether) your contract value grows and the way your payouts might be structured.
Types of Annuities
The typical annuities you’ll run into fall into the following categories.
Immediate Annuities
These do not have an accumulation period. Instead, you purchase the annuity with a single lump sum payment and then immediately begin receiving a regular stream of payments in return.
Depending on your contract, the payments may be guaranteed for life or for a certain period.
Deferred Annuities
Deferred annuities don’t have an accumulation period. You may pay for them with a single lump sum or make regular contributions, but your payouts do not start until a later date. During this deferral period, your annuity may grow. This can increase the base value from which your future payments are calculated, meaning your payouts may be higher.
Fixed Annuities
Fixed annuities, such as those offered by Gainsbridge, grow at a specified rate, much like a CD or savings account. The interest you will earn is specified in the contract and guaranteed by the insurance company you purchase the annuity from.
However, a key difference here is the interest you earn on an annuity contract is tax-deferred. You won’t owe taxes on it until you surrender the annuity or begin receiving payments.
Variable Annuities
Variable annuities allow you to invest your premiums into subaccounts. The value of your annuity may rise or fall depending on the performance of the investments you choose. While your account is likely to grow more over a longer period of time, the rate is not guaranteed and you could potentially lose.
Some variable annuity contracts will set minimum and maximum amounts on the rate you earn.
What Factors Affect the Payout?
The payout you receive from an annuity depends on current economic conditions and personal factors such as your age and contribution amount.
- Just like any other savings or investment account, the amount you contribute greatly determines your payout. The more you invest, the larger payout you can expect to receive.
- Your age plays the largest role. If you purchase an annuity when you are young, the accumulation period will be longer, and your contract will have more time to grow. Waiting longer to begin receiving payments also increases your payment amount, especially for life annuities. That’s because the payouts are based on your life expectancy, which falls as you age. The older you are, the shorter the length of time the insurance company has to guarantee payments.
- The current interest rate also impacts your payment. Higher interest rates allow the insurance company to earn more on their deposits, thereby increasing what they can afford to pay. Low interest rates mean your payouts will be lower.
- The contract provisions you choose to include also come into play. Additional policy terms, called “riders”, will often cost you in the form of higher expenses or a lower payout.
Who Should Consider an Annuity?
Annuities allow you to grow your money on a tax-deferred basis. This can be particularly helpful for people who have otherwise maximized what they can contribute to workplace retirement plans or IRAs but would like to save more.
This may be preferable over putting that money into an interest-bearing account and paying taxes on the interest each year.
Annuities are also a good choice for retirees who need or want more guaranteed income than they will otherwise collect from pensions or Social Security. Because the payments are guaranteed by the insurance company that issues the contract, retirees can use them to help build a secure floor of retirement income.
Pros and Cons of Annuities
As with all financial instrument choices, you should be aware of the pros and cons of annuities.
Pros
- The primary purpose and benefit of annuities is their ability to provide a guaranteed stream of income.
- During the accumulation stage, you do not normally owe any tax on the growth of your annuity. Instead, interest and investment growth taxation is deferred until you withdraw money from your annuity.
- Fixed annuities also provide a way to grow additional savings without exposure to market volatility. Conservative investors, or those with a short time horizon, may find this feature especially attractive.
Cons
- Because annuities are insurance contracts, they have fees and surrender charges. These will vary but often include fees like commissions, administrative fees, investment expenses, and fees associated with contract riders. There may also be indirect fees in the form of caps on the amount of growth that may be credited to your account within a certain period.
- Annuities are less liquid than comparable savings accounts or investments because the contract terms often impose strict limits on the amount and timing of withdrawals and steep penalties for breaching them.
- In exchange for the guarantees offered by annuities, the potential return is often lower than what you might expect on comparable investments or savings accounts that don’t provide those guarantees.
Tips for Getting Accurate Results
To get the most accurate results, make sure you use realistic interest rate assumptions by checking current rates or using an average rate that you are comfortable with. You should also account for any fees that you might expect with the product you plan to purchase.
Also, be mindful of inflation and understand that most annuities do not provide for inflation adjustments. Consider the value of your guaranteed payments in the future based on your inflation assumptions. You can do this by subtracting an assumed inflation rate from the interest you expect to earn on your annuity.
Comparing Annuities to Other Investment Options
Annuities, especially fixed, share similarities with savings accounts and CDs. Here’s how they compare.
Annuities vs. Savings Accounts
Savings accounts provide much more access to your money than annuities. In exchange for that liquidity, savings accounts don’t offer the same payouts as annuities. Annuities often have much higher interest rates than savings accounts.
The interest rate on a savings account can also change, injecting some uncertainty. A fixed annuity, on the other hand, provides a fixed interest rate that doesn’t change.
Both savings accounts and annuities are very secure. Savings accounts are typically covered by FDIC insurance, while annuities are backed by state guaranty associations. These protections provide coverage even if the financial institution or insurance company is unable to fulfill its obligations.
Annuities vs. CDs
Annuity rates are also typically higher than CDs, but both provide a fixed interest rate for the duration of the term. Regardless of when you withdraw your money from a CD, the interest is taxable in the year you earn it.
CDs do not offer the ability to turn your balance into a stream of payments like annuities, but you can take the money you have in a CD at maturity and use it to purchase an annuity.
CDs are also typically covered by FDIC insurance or NCUA if purchased through a credit union.
When to Consult a Financial Advisor
If you are thinking about buying an annuity, you may want to talk with a financial advisor to evaluate whether it is right for you based on your situation and goals.
Planning for Retirement Income
Annuities are best suited for retirement planning when you want or need more guaranteed income. A financial advisor can help you decide the best way to approach this. For example, many people like to ensure that they have enough money from fixed sources to pay for necessities like food, healthcare, and housing. An immediate annuity is a good tool for this.
An immediate annuity is also a good tool for helping you bridge the gap between retirement and when you begin receiving Social Security benefits. This can allow you to take advantage of delayed filing credits and maximize your lifetime guaranteed income.
Evaluating Your Financial Goals
A financial advisor can also help you understand how annuity choices might align with your personal needs and risk tolerance. Investing a portion of your savings into an annuity can help balance your overall risk profile.
In addition to enhancing financial security, an annuity may be helpful for reaching specific goals, too. For example, if you need a specific amount of cash flow for a certain period of time, an annuity can provide that.
Unlock Your Financial Future with Confidence
Annuities allow you to grow your money on a tax-deferred basis and secure a guaranteed stream of income, either that begins immediately or at some point in the future. While these benefits can be helpful in the right situation, they do come with costs that you need to consider. Those costs might be in the form of expenses associated with the contract or a loss of flexibility and liquidity.
As you begin to look at annuities and consider your options, use the annuity calculator to see how much you might need to invest to get the payout you want. Then, when you’re ready to dig deeper, reach out to a financial advisor for tailored advice specific to you.
