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An annuity is a financial product that provides regular income payments, typically used for retirement planning. You invest money with an insurance company or financial institution, and in return, you receive periodic payments over a specified period or for the rest of your life. Annuities can be immediate (starting payments right away) or deferred (starting payments at a future date). They can be fixed (providing guaranteed payments) or variable (payments that fluctuate based on investment performance).

Immediate annuities begin making payments to you shortly after you make your initial investment, typically within one year. They’re ideal for retirees who need income right away. Deferred annuities, on the other hand, allow your investment to grow tax-deferred for a specified period before you start receiving payments. They’re suitable for people who are still working and planning for future retirement income. Deferred annuities often provide larger payments because your investment has more time to grow before distributions begin.

Annuity payments are calculated based on several factors: the amount of your initial investment, the interest rate or investment return, the payment frequency, the length of the payment period, and your life expectancy (for lifetime annuities). For fixed annuities, the insurance company guarantees a specific payment amount. For variable annuities, payments depend on the performance of the underlying investments. Our calculator uses standard actuarial formulas to estimate your payments based on the information you provide.

Annuities offer tax-deferred growth, meaning you don’t pay taxes on investment earnings until you withdraw the money. When you receive payments, a portion of each payment is considered a return of your principal (tax-free) and a portion is considered earnings (taxable as ordinary income). If you purchased the annuity with pre-tax money (like in a traditional IRA), all payments are fully taxable. If you purchased it with after-tax money, only the earnings portion is taxable. Qualified annuities purchased with pre-tax money have required minimum distributions starting at age 72, while non-qualified annuities do not.

Pros of annuities include tax-deferred growth, guaranteed income for life (with lifetime annuities), protection from market downturns (with fixed annuities), and no annual contribution limits (unlike IRAs and 401(k)s). Cons include higher fees than other investment vehicles, surrender charges for early withdrawals, limited liquidity, and potential inflation risk (with fixed annuities). Annuities can be complex financial products with various fees and restrictions, so it’s important to understand the terms and consider consulting with a financial advisor before investing.