Future Value
Total Payments
Total Interest
Table of Contents
Annuity math, in one place
An annuity is just a stream of equal payments plus an interest rate — the same math powers mortgages, pensions, lottery payouts, and insurance products. This calculator answers two questions: what is that future stream worth today (present value), and what does today's contribution stream grow into (future value).
How an annuity is calculated
The two core formulas for an ordinary annuity (payments at the end of each period):
PV = PMT × [ (1 − (1 + r)−n) ÷ r ]
FV = PMT × [ ((1 + r)n − 1) ÷ r ]
- PV — present value (lump sum today equivalent to the stream)
- FV — future value (what the stream grows into)
- PMT — payment per period
- r — periodic interest rate (annual rate ÷ periods per year)
- n — total number of periods (years × periods per year)
Worked example using the calculator's defaults ($500/month, 5% annual, 20 years, monthly payments, future value):
- PMT = $500, annual rate = 0.05, periods/year = 12, years = 20
- r = 0.05 ÷ 12 = 0.004167
- n = 20 × 12 = 240 periods
- (1 + r)n = (1.004167)240 ≈ 2.7126
- FV = 500 × (1.7126 ÷ 0.004167) ≈ $205,517
- You contributed 500 × 240 = $120,000; the rest ($85,517) is compound interest
Switch the dropdown to "Present Value" and you'd get roughly $75,771 — the lump sum today that, at 5% interest, would fund exactly those 240 monthly payments of $500.
Lump sum vs annuity: how to decide
This is the most common annuity decision in real life — pension buyouts, lottery prizes, structured settlements. The calculation is straightforward: compare the lump-sum offer against the present value of the payment stream at a realistic discount rate. The table below shows the present value of $1,000/month for life at different discount rates and life expectancies:
| Discount rate | 20 years | 25 years | 30 years |
|---|---|---|---|
| 3% | $180,311 | $211,895 | $237,189 |
| 5% | $151,525 | $171,060 | $186,282 |
| 7% | $128,983 | $141,487 | $150,308 |
| 9% | $111,145 | $119,161 | $124,282 |
Higher interest rates lower the present value of future payments — which is why lump-sum offers usually look more attractive when rates are high. If the lump-sum offer is meaningfully larger than the PV at a rate you can realistically earn, taking the lump sum can be the better deal mathematically — provided you can handle the investing without dipping in.
Fixed, variable, and indexed annuities
Insurance-issued annuities come in three flavors, with very different risk and fee profiles:
| Type | Return | Typical annual fees | Best for |
|---|---|---|---|
| Fixed (deferred or SPIA) | Guaranteed rate set at purchase | 0–0.5% | Lifetime income, simple structure |
| Variable | Tied to investment sub-accounts | 2–3%+ | Tax-deferred growth (rarely best option) |
| Indexed (equity-indexed) | Capped portion of an index return | 1–2% | Buyers who want some upside with downside protection |
The SEC has repeatedly flagged variable and indexed annuities as among the most complex retail products sold, with high commissions creating incentive for over-selling. If you're considering one, ask the seller in writing: (1) the all-in annual cost including riders, (2) the surrender charge schedule, and (3) the participation rate / cap rate if indexed. If they won't put it in writing, walk away.
Immediate vs deferred annuities
An immediate annuity (SPIA) converts a lump sum into income that starts within 12 months. A 65-year-old paying $100,000 today typically receives $550–$650/month for life. This is the cleanest, lowest-fee form of annuity and most defensible as "longevity insurance" — you can't outlive the payments.
A deferred annuity has an accumulation phase (you contribute or pay a premium, the balance grows tax-deferred) and then a distribution phase (you annuitize into income, or take withdrawals). Deferred annuities often carry surrender charges of 5–10% in the early years — meaning early withdrawal costs you a significant chunk of principal. For most savers, a regular IRA or 401(k) achieves the same tax deferral with lower fees and full liquidity.
Limitations of this calculator
- Constant rate assumption. Real interest rates and investment returns fluctuate; this uses a single rate for the whole term.
- Ordinary annuity only. If your product pays at the beginning of each period (annuity due), the actual value is roughly (1+r) times the figure shown.
- Ignores taxes. Annuity income is generally taxable as ordinary income on the earnings portion. The exclusion ratio for after-tax-funded annuities and the full taxability of qualified-account annuities aren't reflected here.
- Ignores fees. Real variable and indexed annuities lose 2–3%/year to fees, which dramatically reduces accumulated value over decades.
- Ignores mortality. Lifetime annuities pay until you die. An "expected value" calculation requires a life expectancy — not used here.
Sources & references
- National Association of Insurance Commissioners (NAIC) — Annuities Consumer Alert — state-regulator overview of annuity types and risks.
- SEC — Variable Annuities: What You Should Know — the federal regulator's guidance on fees, surrender charges, and complexity.
- Consumer Financial Protection Bureau — consumer guidance on pension lump-sum decisions and retirement income products.
- NOLHGA — National Organization of Life & Health Insurance Guaranty Associations — state guaranty association coverage limits for annuity buyers.
FAQs
It depends on the type and the alternative. A single-premium immediate annuity (SPIA) from a highly rated insurer often delivers better lifetime income per dollar than a do-it-yourself withdrawal strategy, because the insurer pools longevity risk across thousands of buyers. Variable and indexed annuities are a different story — they typically carry fees of 2–3% per year (mortality & expense charges + rider costs + sub-account fees), and the SEC has flagged complexity and surrender charges as common consumer-harm areas. As a rule of thumb: simple fixed or immediate annuities can make sense for income; complex variable annuities sold on commission rarely do.
Timing of the payment within each period. An ordinary annuity (or annuity-in-arrears) pays at the END of each period — this is how mortgages, car loans, and most retirement income products work. An annuity due pays at the BEGINNING of each period — rent and lease payments are the everyday example. Mathematically, an annuity due is worth (1+r) times more than an ordinary annuity with the same terms, because every payment sits in the account one period longer. This calculator uses the ordinary-annuity convention.
As of 2025–2026, a $500,000 single-premium immediate annuity for a 65-year-old typically pays around $2,800–$3,200 per month for life (single life, no survivor benefit). Joint-life with 100% to spouse drops that to roughly $2,400–$2,700. The exact figure depends on prevailing rates, insurer, gender (where allowed), and any riders. Higher interest rates and older starting ages both produce higher monthly payouts. Get quotes from at least 3 highly rated insurers before buying — payouts can vary 10–15% on identical terms.
Annuities are not FDIC insured. They are backed by the issuing insurance company plus state guaranty associations, which typically cover annuity benefits up to $250,000–$500,000 per insurer per state (varies by state). Coverage is meaningfully weaker than FDIC bank coverage and is generally not advertised pre-sale. To reduce risk: buy from insurers rated A or better by AM Best, S&P, or Moody's, and consider splitting a large purchase across multiple insurers to stay within state guaranty limits.
Run the present-value calculation. If your employer offers a $400,000 lump sum or $2,000/month for life, the PV of $2,000/month at a 5% discount rate over a typical 25-year retirement is roughly $342,000. In that case the lump sum is mathematically larger. BUT — the pension is a true lifetime annuity that doesn't run out at year 25, and it removes investment risk. Take the lump sum if: you're in poor health, expect well-above-average returns from investing it, or already have generous lifetime income from other sources. Take the pension if: you're healthy, lack investing experience, or value the certainty of a paycheck you can't outlive.