Annuity Calculator
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 payment amount, rate and term, and the calculator returns present value (lump sum today worth the stream) and future value (what the stream grows to by end of term). Supports ordinary annuity (payments at end of period) and annuity due (payments at start).
How to evaluate an annuity
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1
Enter the payment amount
The recurring payment — monthly, quarterly or annual. The tool handles any frequency by matching it to the rate.
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2
Set the periodic interest rate
If your APR is 6% and payments are monthly, the periodic rate is 0.5% (6% / 12). The tool does this conversion for you.
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3
Pick number of periods
Total payments over the life of the annuity. 20 years monthly = 240 periods.
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4
Choose ordinary or due
Ordinary (most common, payment at end of period) vs. annuity due (payment at start). Annuity due is worth slightly more — you get each payment one period earlier.
The two core formulas
Present value of an ordinary annuity:
PV = PMT × [(1 - (1 + r)^-n) / r]
Future value of an ordinary annuity:
FV = PMT × [((1 + r)^n - 1) / r]
Where:
- PMT = payment per period
- r = periodic rate (APR / payments per year)
- n = number of payments
For annuity due, multiply either formula by (1 + r).
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 |
Present value example
Would you take $500/month for 20 years, or $60,000 today, at 6% discount rate?
PV = 500 × [(1 - (1.005)^-240) / 0.005] = $69,790
The payment stream is worth about $69,790 today, so the $60,000 lump sum is the worse deal. But change the discount rate to 9% and the PV drops to $55,575 — the lump sum wins.
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.
Because each payment arrives one period earlier. Money now is worth more than money later (time value of money), so shifting every payment one period earlier increases both PV and FV by a factor of (1 + r).
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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