Annuity calculator

Step 1: Choose accumulation or payout

Accumulation mode projects what a deferred contract grows to before payments begin. Payout mode answers the other question: what monthly income a lump sum will buy.

Most annuity calculators only do one of these. The tool that currently ranks first for "annuity calculator" has no age field at all, which means it cannot answer the income question no matter what you type into it.

Step 2: Enter your premium, your age, and when payments start

Age is what separates a real payout estimate from a loan amortization. A fixed-term payment can be worked out with arithmetic alone. A payment that lasts as long as you do cannot.

Payments starting within about a year make this an immediate annuity. Push the start date out and you are in deferred territory, where the money compounds first.

Step 3: Pick a payout structure and specify whether the money is qualified

Structure sets the monthly figure and what happens when you die. Qualified or non-qualified sets the tax treatment, and the difference is large enough that getting it wrong makes the tax output meaningless.

Qualified means the money came from a pre-tax account like a traditional IRA or a 401(k). Non-qualified means you funded it with money you had already paid tax on.

What this estimate is, and what it is not

It is an illustration built from a published method, not a quote from a carrier.

A real quote will differ, for reasons worth naming: the insurer's own expense loading, its own mortality assumptions, its credit quality, your state, and gender-based pricing where state law permits it. No federal agency publishes benchmark annuity payout rates, which is why every other calculator's numbers trace back to commercial quote aggregators. Most of them do not tell you that.

What is an annuity?

An annuity is a contract with an insurance company. You hand over money, and the insurer promises income back, either starting now or at a date you pick.

Two things it does that a savings account cannot: defer tax on growth, and keep paying no matter how long you live.

How do annuities work?

Money goes in as a single premium or a series of deposits and grows tax-deferred through the accumulation phase. At some point it converts to income in the payout phase.

Once you annuitize, the lump sum is generally gone. You have traded it for the income stream, and that trade is the thing to understand before signing anything.

How is monthly annuity income calculated?

A fixed-term payout is standard time-value-of-money math: the payment equals the premium times the periodic rate, divided by one minus (one plus the periodic rate) raised to the negative number of payments.

Run $200,000 through that at a 5% nominal annual rate over 240 monthly payments and you get $1,319.91 a month. No assumptions about anyone's lifespan are involved, because the term is fixed. That is why this is the honest place to start.

A life payout adds a second dimension. The insurer values every future payment twice, once for the time value of money and once for the probability you are alive to collect it, then adds up the results. Two inputs drive it: an interest rate, and a mortality table.

Ours uses the 10-year Treasury rate and the unisex mortality table the IRS prescribes under section 417(e)(3)(B), which is the combination the Department of Labor requires for the lifetime income illustrations that appear on pension statements.⁴

What a mortality credit actually is

Everyone in an annuity pool pays in. Some die earlier than the table predicted, and the money they did not collect stays in the pool, raising payments for everyone still alive.

That transfer is the whole reason a life annuity can pay more than a bond ladder built from the same money. It is also why a payout rate at 80 looks implausibly high next to any bond yield you could name.

The clearest way to see it is to put a fixed-term payout next to a life payout at each age. The fixed-term column does not move, because the term does not change. The life column climbs. The gap between them is the mortality credit.

A payout rate is not a return

An 8% payout rate is not an 8% yield, and treating it as one is the most common mistake in this category.

Each payment is part return of your own principal, part interest, part mortality credit. Only the second two are earnings. What you actually earn depends on how long you live relative to the table, which is not knowable in advance and is exactly the risk the contract is designed to move off your shoulders.

Qualified annuities are fully taxable

If the annuity was bought with pre-tax IRA or 401(k) money, every dollar of every payment is ordinary income. Nothing was taxed going in, so there is no basis to recover.

The exception is after-tax money you tracked on Form 8606. That portion comes back tax-free, spread across your payments.³

The exclusion ratio for a non-qualified annuity

Buy an annuity with money you already paid tax on, and part of each payment is simply your own money coming back. Section 72(b)(1) sets out how much.¹

The exclusion ratio is your investment in the contract divided by your expected return. Expected return is the annual payout multiplied by the life expectancy factor from Table V for a single life, or Table VI for two lives, in Publication 939.²

Two rules follow from that, and almost nobody publishes either one:

• Once you have recovered your full investment, the exclusion stops and every subsequent payment is 100% taxable.¹ Live a long time and your tax bill goes up partway through.
• Die before recovering it, and the unrecovered amount is deductible on your final return.¹

The 10% additional tax and the 3.8% NIIT

Non-qualified withdrawals carry a 10% additional tax under section 72(q) unless you are 59½ or older. There is an important carve-out: section 72(q)(2)(I) exempts an immediate annuity, defined as a single-premium contract that starts paying within a year in substantially equal payments.¹

On the net investment income tax, the two annuity types split. Non-qualified annuity earnings are net investment income and go on Form 8960. Distributions from qualified plans and IRAs are excluded from it entirely.³

One more use worth knowing: a qualifying longevity annuity contract lets you move up to $210,000 of premium in 2026 out of the balance that drives your required minimum distributions, deferring that income until 85. The Tweed RMD calculator covers how that interacts with the rest of your accounts.

Surrender charges and early withdrawals

A deferred annuity is not liquid the way a savings account is. Most contracts let you take out around 10% a year without penalty and charge you on anything above that, with the charge shrinking each year until it disappears.

Stack that on the 10% additional tax before 59½ and an early exit can cost a lot more than people expect when they sign.

Why an income annuity has no fee line

An immediate income annuity does not itemize. The insurer's expenses, the agent's commission and the company's margin are all priced into the monthly figure you are offered.

That sounds worse than it is. It means comparing quotes across carriers is already an after-cost comparison, which is more than you can say for most financial products. The number in front of you is the number you get.

Ordinary annuity versus annuity due

Timing changes the answer. An ordinary annuity assumes deposits at the end of each period; an annuity due assumes the start.

Take $100,000 of starting principal, $500 a month added, a 6% nominal annual return, over ten years. The ordinary annuity ends at $263,879.35. Shifting every deposit to the start of the period brings it to $264,289.05, about $410 more for nothing but timing.

That gain is smaller than a lot of sources claim, because only the deposits move. Your starting principal compounds over the same 120 periods either way.

Cap rates, participation rates, and floors in a fixed index annuity

A fixed index annuity credits the lesser of a cap or the index return times a participation rate, with a floor at zero.

With an 8% cap, a 70% participation rate, and a 0% floor:

• The index gains 10%, you are credited 7.0%.
• The index gains 15%, you are credited 8.0%, because the cap binds.
• The index loses 12%, you are credited 0.0%.

The floor is real protection. It also comes with no dividends and a ceiling on good years, which is the trade the product is making on your behalf.