Softonic

Annuity Calculator

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An annuity is a series of fixed payments over time, either paid into you (retirement income) or paid out by you (loan amortization, mortgage). Enter the lump sum you start from (the principal), the annual rate, the term in years and how often payments are made, and the calculator returns the payment each period, the total paid over the term and the total interest. This is the standard amortization calculation used for loans and for turning savings into retirement income.

How to use the annuity calculator

  1. 1

    Enter the principal

    The lump sum you start from: the amount you borrow, or the savings you convert into income. The tool works out the payment that pays it off over the term.

  2. 2

    Set the annual rate

    Enter your APR or expected annual return. The tool converts it to the periodic rate using the payment frequency: 6% annual with monthly payments becomes 0.5% per period.

  3. 3

    Pick the term and frequency

    The number of years and how often payments are made: monthly, quarterly, semi-annual or annual. 20 years monthly = 240 payments.

  4. 4

    Read the results

    The payment each period, the total paid over the term and the total interest. The payment stays the same every period; only the split between interest and principal changes.

The core formula

The calculator solves the standard amortization formula for the payment:

PMT = PV × [r / (1 - (1 + r)^-n)]

Where:

  • PMT = payment per period
  • PV = principal (the lump sum today)
  • r = periodic rate (annual rate / payments per year)
  • n = number of payments

Each payment covers the interest for the period plus part of the principal, so the balance reaches zero exactly at the end of the term.

Common annuity types

Type Structure Typical use
Immediate annuity Lump sum now → payments start next period Retirement income
Deferred annuity Contributions build up → payments later Tax-advantaged savings
Fixed annuity Guaranteed rate, guaranteed payments Conservative income
Variable annuity Rate tied to sub-accounts (equity, bond funds) Growth + longevity coverage
Life annuity Pays until death Longevity insurance
Period-certain Pays for a fixed number of years Bridging to Social Security

Payment example

Would you borrow $200,000 at 6% annual for 30 years with monthly payments?

PMT = 200,000 × [0.005 / (1 - (1.005)^-360)] = $1,199.10

Over 360 payments that comes to about $431,676 in total, of which $231,676 is interest. Raise the rate to 9% and the payment becomes $1,609.25, with about $579,328 paid in total and $379,328 of interest.

Annuity fees to watch

Commercial annuity products (especially variable annuities) have:

  • Mortality and expense charge (1-1.5% per year)
  • Administrative fees ($25-50/year)
  • Surrender penalty if cashed in early (5-10% sliding to 0 over 5-10 years)
  • Sub-account expense ratios (0.5-2% on variable accounts)

Stack these and a variable annuity can have 2.5-4% in annual drag, which a low-cost index fund does not.

Frequently Asked Questions

Mechanically very similar, both pay a stream over time. Pensions are employer-sponsored and usually not individually priced; commercial annuities are bought from an insurance company with a lump sum you control. Both can be “life” (pays until death) or “period-certain” (pays for a fixed term).

It is a form of longevity insurance, not an investment in the growth sense. The IRR on a fixed annuity is usually 2-4%, which is lower than equity markets historically return. The value is predictability and lifetime-of-payments protection, not upside.

The calculator uses the amortization formula: payment = principal × periodic rate / (1 - (1 + periodic rate)^-n). Each payment covers the interest for that period plus a share of the principal, so the balance reaches zero at the end of the term. The payment amount stays the same every period.

Fixed annuities pay the same dollar amount regardless of inflation, so purchasing power erodes over a 20-30 year horizon. Inflation-adjusted (COLA) annuities exist but start at 20-30% lower initial payments to fund the cost of the COLA rider.

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