The short answer
- At 5%, $200,000 pays about $1,319.91 a month for 20 years, $316,779 in total.
- Spread over the average life expectancy at 65 (22.9 years), the same $200,000 pays about $1,223.18 a month.
- An income of $1,000 a month for 25 years costs about $171,060 at 5%.
- Real quotes depend on the insurer, your age, sex and health, and fees; use this as a yardstick.
What an annuity is
An annuity is a contract with an insurance company. You pay a premium, either as one lump sum or over time, and the insurer promises payments back. The insurer invests the premium, mostly in bonds, and pays you from both the premium and what it earns.
"Annuity" is also a maths term for any series of equal, regular payments, such as loan repayments, rent or a pension. The formulas in this calculator apply to all of them.
Types of annuity
- Income starts
- Within a year
- Used for
- Turning savings into income now
- Income starts
- Years later
- Used for
- Growing money tax-deferred, then income
Deferred annuities come as fixed (a set rate, like a CD from an insurer), variable (invested in funds, with market risk) and indexed (returns linked to a stock index with caps and floors). This calculator models a fixed immediate annuity, the simplest kind, or the payout phase of a deferred one.
How the calculator works
The income is the payment that turns the lump sum into exactly zero by the last payment, with interest added on what is left each month. That payment is the lump sum divided by the annuity’s present value factor:
Payment = Lump sum × i ÷ (1 − (1 + i)−n), where i is the rate per period (the yearly rate ÷ 12 for monthly payments) and n is the number of payments.
Working out the cost of an income runs the formula the other way. When payments rise each year, the calculator values each payment separately and adds them up.
A worked example
- Rate per month: 5% ÷ 120.4167%
- Number of payments: 20 × 12240
- Monthly payment$1,319.91
- Total received$316,779
- Of which interest$116,779
How the premium is paid back
| After year | Value left |
|---|---|
| 0 | $200,000 |
| 5 | $166,910 |
| 10 | $124,443 |
| 15 | $69,943 |
| 20 | $0 |
Early payments are mostly interest on a large balance; later ones mostly return your own money. Over the whole term, about 63.1% of the money you receive is your premium coming back and 36.9% is interest.
Income for life
A lifetime annuity pays until you die, however long that is. Insurers can afford this because they pool many buyers: those who die early leave money that pays those who live long. To estimate the income, the calculator spreads payments over your life expectancy from the IRS Single Life Table, which the IRS publishes for required distributions from inherited retirement accounts.
An estimate, not a quote
Insurers price with their own tables, by sex and sometimes health, plus a margin for costs and profit. Many quotes for a 65-year-old will differ from the figure here. Use the calculator to judge whether a quote is reasonable, not to predict it.
How age changes the income
The older you are when payments start, the fewer payments the insurer expects to make, so each one is bigger. Waiting also means spending other savings in the meantime, so the best age depends on your whole plan.
How interest rates change the income
| Interest rate | Monthly income |
|---|---|
| 3% | $1,109.20 |
| 4% | $1,211.96 |
| 5% | $1,319.91 |
| 6% | $1,432.86 |
| 7% | $1,550.60 |
Annuity payouts follow bond yields. Buying when rates are high locks in a higher income for good; buying when they are low locks in a lower one. Some people spread purchases over several years to average out the rate.
The cost of a target income
Switch the calculator to "Cost of a target income" to see what a given income would cost. An income of $1,000 a month for 25 years costs about $171,060 at 5%, against $300,000 of payments received. This is a useful way to see what part of your spending a guaranteed income could cover. Our retirement calculator shows the gap between your spending and Social Security.
Inflation and rising payments
A fixed annuity pays the same dollars every year, but prices rise. At 2.5% inflation, a payment is worth about 40% less in today’s money after 20 years. Some insurers offer payments that rise by a set percentage each year. For the same $200,000 at 5% over 20 years, payments rising 2% a year start at $1,122.41 a month instead of $1,319.91, but total $327,260 instead of $316,779. A rising income of $1,000 a month for 25 years costs $208,340 instead of $171,060. The inflation calculator shows how much prices have risen in the past.
Ordinary annuity vs annuity due
- Paid
- At the end of each period
- Examples
- Loan payments, most annuity income, bond coupons
- $10,000 a year, 20 years, 5%: present value
- $124,622
- Paid
- At the start of each period
- Examples
- Rent, insurance premiums, lease payments
- $10,000 a year, 20 years, 5%: present value
- $130,853
Each payment of an annuity due arrives one period earlier, so it is worth more: its present value is the ordinary figure × (1 + i). For monthly payments the difference is small: $200,000 at 5% for 20 years pays $1,319.91 a month at the end of each month or $1,314.43 at the start.
Present and future value
The present value of an annuity is what its payments are worth today: the lump sum that, invested at the rate, would pay them exactly. The future value is what the payments grow to if each is invested at the rate until the end.
| Ordinary (end of month) | Due (start of month) | |
|---|---|---|
| Future value | $502,258 | $504,769 |
The future value is how a regular saving plan builds up; the compound interest calculator works it out with a starting balance too.
Payout options
- Straight life: the highest income, but payments stop at death, even if that is soon after buying.
- Life with period certain: payments for life, and to your beneficiary for the rest of a guaranteed period (say 10 years) if you die sooner.
- Cash or installment refund: if you die before receiving your premium back, the rest goes to your beneficiary.
- Joint and survivor: pays while either spouse is alive, often at a reduced rate after the first death.
- Period certain only: a set number of years, like the term option in the calculator.
Every guarantee added lowers the payment, because the insurer expects to pay out more.
How annuity income is taxed
If you bought the annuity with after-tax money (a non-qualified annuity), part of each payment is a tax-free return of your premium and part is taxable interest. The IRS exclusion ratio, explained in Publication 939, sets the tax-free share: roughly your premium divided by the total you expect to receive. Once you have received your whole premium back tax-free, later payments are fully taxable.
If the annuity was bought inside a traditional IRA or 401(k), or with pre-tax money, every payment is taxed as ordinary income. Payments from a qualified annuity can count toward required minimum distributions; the RMD calculator covers those rules.
What protects your money
Annuities are backed by the insurance company, not the FDIC. Check the insurer’s financial strength ratings from agencies such as AM Best or S&P. If an insurer fails, your state’s life and health insurance guaranty association steps in up to a limit, commonly at least $250,000 of an annuity’s present value per person per insurer, though limits vary by state. Spreading a large purchase across insurers keeps each one within the limit.
Fees and surrender charges
A simple immediate annuity has no separate yearly fee: the insurer’s costs are built into the payout. Deferred variable and indexed annuities can carry mortality and expense charges, fund fees and rider fees that together reach 2% to 3% a year, plus surrender charges of several percent if you withdraw in the first years. Ask for every charge in writing.
Annuity or your own withdrawals?
Instead of buying an annuity, you can keep your savings invested and take withdrawals. You keep control and anything left goes to your heirs, but the money can run out if you live long or markets do badly. An annuity removes that risk for the part of your savings you put in it. Many retirees do both: an annuity to cover essential bills and investments for everything else. The retirement withdrawal calculator shows how long savings last.
Before you buy
- Keep enough cash and investments for emergencies: an annuity premium is usually locked in.
- Get quotes from several insurers for the same options.
- Check the insurer’s ratings and your state’s guaranty limit.
- Decide whether you need a survivor or refund option.
- Ask how payments are taxed and whether there are any fees.
Key numbers
| Item | Figure |
|---|---|
| Life expectancy at 65 (IRS Single Life Table) | 22.9 years |
| Life expectancy at 70 | 18.8 years |
| $200,000, 5%, 20 years: monthly income | $1,319.91 |
| $1,000 a month, 25 years, 5%: cost | $171,060 |
| Typical guaranty association limit (annuity present value) | At least $250,000 in most states |
Social Security is an annuity too
Social Security pays a lifetime income that rises with inflation, which would be expensive to buy from an insurer. Delaying your claim from 62 to 70 raises the monthly benefit for life, which is often the cheapest way to get more guaranteed, inflation-linked income. Consider that before buying a private annuity.