Annuity calculator

An annuity is a financial contract that offers a stream of income, often in retirement, in exchange for money paid into the annuity. Annuities are a popular retirement strategy because they can create cash flow and ensure that clients never exhaust or outlive that income.

Annuities are usually created and offered by insurance companies, and clients can purchase an annuity by depositing a lump sum or paying into the contract over time. 

The annuity will pay out over a predetermined period of time, as specified in the contract. The time period may be a fixed period, such as 20 years, or perhaps for the rest of the client’s life. Some annuities may even guarantee a payout for your lifetime and your spouse’s. 

Annuities can be structured in many different ways depending on the client’s needs, giving a lot of flexibility in creating a setup that works for them. But annuities are not without downsides.

Annuities come in a few different types, defined by their how much they’ll pay out and when. In terms of potential returns, three main types of annuities are:

• Fixed: A fixed annuity guarantees a minimum rate of return on the principal and pays out over a fixed period. 
• Variable: A variable annuity buys into various investments, typically mutual funds. The ultimate return depends on how the investments perform.
• Indexed: An indexed annuity offers a return that tracks an index such as the Standard & Poor’s 500 Index, which holds about five hundred of America’s top companies. 

Annuities can also be defined by when they pay out:

• Deferred annuities pay out at some future point in time, with the client paying into the annuity over a period of time, often over decades of working.
• Immediate payment annuities begin paying as soon as you deposit a lump sum.

Annuities are popular because they offer a range of benefits:

• Reliable cash flow: Perhaps the biggest benefit of annuities is that they can provide reliable cash flow, helping to ensure that you never run out of income in retirement. 
• Can avoid investing yourself: If you don’t like the idea of investing your money, you can effectively let someone else do it through an annuity, for a price.
• Can be structured many ways: Annuities can be structured in many different ways depending on your needs. Various features will add on incremental costs, but you can get features you want such as lifetime income.  
• Tax-deferred growth: Your distribution is taxed only on the earnings on your contribution, not the contribution you put into the account, since that’s after-tax. You won’t pay tax until you start taking withdrawals on the account.
• No maximum contribution: Unlike other popular retirement accounts such as an IRA and 401(k), you’re not limited to a maximum annual contribution on an annuity.

Annuities can offer a variety of benefits but also typically have a variety of downsides, too:

• Complexity: Annuities are highly complex contracts with dozens of pages of fine print. You’ll need to read carefully to understand your rights and benefits, your rate of return and any other benefits. And one annuity can differ drastically from the next.
• Sales commissions: Commissions can be enormous, up to 10 percent, and the contract may obscure how you’re charged. Complex annuities tend to charge more. 
• Illiquidity: Money put into an annuity is generally tied up for a long period of time and can be hard to access if you need a substantial sum for an emergency. 
• Other costs: Annuities may tack on a number of other costs. For example, if you have a variable annuity, your mutual funds will charge annual management fees, which may cost substantially more than comparable publicly traded mutual funds.

Given the complexity of annuities, you may want to consult a fee-only financial advisor who’s looking out for your best interests.