Annuity Calculator

Using Annuities to Generate Passive Investment Income

People have a lot of options when it comes to selecting the right investments for their portfolios. These investments include stocks, bonds, real estate, and cryptocurrencies. Each investment type has its own benefits and risks. For this reason, some investors turn to annuities as a safe alternative to protect them from changes in the market.

Annuities are special investments issued by insurance companies that are designed to provide a stable, consistent payment to the investor. In most cases, the insurance company guarantees a certain payment regardless of the condition of the market. This is useful for retired people since the payments will continue for the policyholder’s life.

Example

Bob and Linda want to retire in 15 years. They are concerned that the value of their investments could decrease during their retirement, causing them to run out of money. They decide to invest a portion of their money in an insurance annuity to lock in guaranteed income to protect their portfolio. They invest $500,000 in an annuity that guarantees payment of approximately $2,100 per month.

Understanding the Annuity Formula

Understanding the formula behind basic annuity growth is relatively simple. Interest accrued during each period is added to the starting balance and compounds over time.

The formula to perform an annuity calculation is:

FV = PV (1 + R)ⁿ

• FV = Future Value of the annuity (including all annuity interest)
• PV = Present Value (starting principal before any annuity interest)
• R = Interest rate
• n = Number of periods (number of months, years, etc.)

Periodic Addition Calculation

In many cases, investors will start with an initial amount and make additional investments over time. For example, an investor may start with a $100,000 annuity and contribute an additional $10,000 yearly until they retire. The calculation above is used to calculate the long-term growth of that initial investment. However, the calculation gets more complicated as additional payments are made. Fortunately, our annuity calculator handles all the complex calculations required to factor in additional periodic contributions.

How to Use the Annuity Calculator

An online annuity calculator makes calculating the growth of an insurance annuity easy. With just a few data points, you can decide if an annuity will provide the investment return that meets your financial needs.

• Step 1: Enter the starting principal amount. This is the initial amount that you deposited to open the annuity.
• Step 2: Next, enter the additional amount you plan to contribute regularly. You can have the option to calculate annual or monthly investments. Sometimes, investors may put in a small amount each month with a larger deposit made once a year. The calculator also allows users to select whether their contributions are made before or after the annuity interest is calculated. Additions made at the beginning of the period will yield slightly higher returns over time.
• Step 3: Select the interest rate and term options. Annuities generally don’t have very high interest rates. Annuity interest rates typically range between 2 and 4 percent. It’s important to verify this rate with an insurance provider. In addition, you can choose the term over which your investment will grow (for example, how many years until you retire and begin to draw annuity payments).
• Step 4: Click “Calculate” and review the results. The results will provide graphs showing the annuity's growth and the principle-to-interest breakdown. You can also see a monthly and annual schedule of each period's interest, beginning balance, and end balance.

Real Example

Let’s say that you are planning to retire in 25 years. You believe that an insurance annuity will provide you with a stable income and want to start investing. You have $100,000 that you inherited to get started. You can also add $100 per month from your regular salary and $1,000 per year from your work bonus. Your insurance broker has recommended an annuity that earns 3.5% interest.

To run this calculation, enter the following values into the annuity calculator:

• Starting Principal: $100,000
• Annual Addition: $1,000
• Monthly Addition $100
• Add at period’s: End
• Annual Interest Rate: 3.5%
• After: 25 years

Once you hit the Calculate button, you’ll see that the total value of your annuity will be $322,759.31 saved for retirement after 25 years of investing.

Key Benefits and Helpful Tips

Knowing how to correctly calculate annuity returns can help you make better financial decisions and understand if investing in an annuity is right for you. Here are some key benefits and helpful tips to make the most of our annuities calculator.

Key Benefits

• No Memorizing Formulas - Calculating the future value of an annuity can get complex, especially when you add additional principal throughout the term of the investment. This calculator simplifies the process and doesn’t require any memorization of formulas.
• Exploring Investment Options - There are numerous investment options available in the market. Being able to quickly and easily calculate the expected return from an annuity helps the user compare annuities with other investments.

Helpful Tips

• Protect Large Sums of Money - Annuities are a great way to protect large sums of money, like an inheritance or lottery winnings. Since payments are made over time, the annuity holder can’t have access to the full value of the annuity without significant tax implications.
• Inflation and Fee Adjustments - The value of fiat currency decreases over time due to inflation. If you want to see the results in terms of today’s currency, subtract the anticipated inflation rate from the annuity return. For example, if the annuity grows at a rate of 4% and inflation is expected to be 2%, your real rate of return will only be 2%. Also, don’t forget to factor in the insurance company's fees to administer the annuity.
• Fixed Interest Rate - Our calculator assumes a fixed interest rate over time. Some annuities offer variable interest rates that move up and down with the market.
• Annuity Payouts - Our free annuity calculator helps you determine the total value of your annuity after a certain period of time. If you want to calculate the estimated annuity payments, you can enter the future value of the annuity into our Annuity Payout Calculator.