Annuity

How Annuity Growth and Payout Are Calculated

An annuity is a series of equal payments made at regular intervals — growing a lump sum with level contributions, or paying out a level income stream from a lump sum until it’s fully depleted. Choose whether you want to find an ending balance (growing mode) or the lump sum needed today to fund a fixed payout (payout mode), then enter the amount, interest rate, and number of years to see the result.

This is distinct from the Loan Calculator calculator, which finds the payment on money you borrow and owe back — the opposite real-world direction. It’s also distinct from the

Retirement / 401(k) Savings Calculator calculator, a full retirement-specific planner with contribution limits and employer-match guidance built in; this calculator is the general-purpose annuity math itself, useful for any fixed-payment scenario, not just retirement.

The Formula

Growing mode — future value of a starting balance plus a level end-of-year contribution:

$$FV = P(1+r)^n + PMT \times \frac{(1+r)^n - 1}{r}$$

Payout mode — present value of a level end-of-year payout that fully depletes the balance after exactly $n$ years:

$$PV = PMT \times \frac{1 - (1+r)^{-n}}{r}$$

Worked Example

Starting with $5,000, contributing $2,000 per year at 5%, over 10 years:

1. Ending balance: $5,000(1.05)^{10} + 2,000 \times \frac{(1.05)^{10} - 1}{0.05} \approx \$33,300.26$.
2. Total contributions (starting balance + 10 years of deposits): $25,000.
3. Growth from interest: $8,300.26.

Key Factors to Consider

• A “fixed” annuity and a “variable” annuity are genuinely different products. A fixed annuity pays a guaranteed rate, closely matching the constant-rate math this calculator uses. A variable annuity’s return depends on underlying investment performance and can rise or fall — this calculator’s constant-rate assumption is a much less accurate fit for that type of product.
• Real annuity products often carry fees that reduce the effective return. Insurance-company annuities in particular can include mortality and expense charges, administrative fees, and surrender charges for early withdrawal — none of which are modeled here. A real product’s actual payout or growth is typically somewhat lower than this pure-math estimate suggests.
• Immediate vs. deferred annuities start paying out at different times. An immediate annuity begins payments right after the lump sum is paid in; a deferred annuity grows for a period first before payments begin — check which structure you’re actually evaluating before comparing numbers.
• Inflation isn’t factored into the payout, unless the specific product includes a cost-of-living adjustment. A level payment that looks generous today buys progressively less in real terms over a multi-decade payout term unless the annuity explicitly adjusts for inflation.

Common Mistakes

• Assuming the payout amount in payout mode is the same as the lump sum needed. It isn’t — the lump sum is always smaller than the total amount paid out over the term, since the remaining balance keeps earning interest while it’s being drawn down.
• Forgetting this uses end-of-period payments, not beginning-of-period. A “due” annuity (paid at the start of each period) produces a slightly different result than the “ordinary” annuity math used here — the difference is small but real for short terms or high rates.
• Treating the result as a guaranteed real-world rate. Real annuity products and structured settlements rarely compound and pay on a perfectly clean annual schedule at a perfectly constant rate — always check the actual contract terms.

Useful to Know

Annuity earnings are typically tax-deferred until withdrawal, and withdrawing early can trigger a tax penalty on top of ordinary income tax. Money growing inside most annuity contracts isn’t taxed year to year the way a regular taxable brokerage account is — tax is deferred until you actually take a distribution, at which point the earnings portion is generally taxed as ordinary income rather than at a lower capital-gains rate. Withdrawing earnings before age 59½ can also trigger an additional 10% federal tax penalty, similar to the early-withdrawal rule on retirement accounts (see FINRA’s annuities investor guide for the full rules). None of this calculator’s math accounts for taxes or penalties — it’s the underlying growth/payout arithmetic only, and your actual after-tax result depends on your specific product, account type, and tax situation.