How it works
An annuity is a contractual product designed to convert money into a structured series of payments—either accumulating value through regular contributions or distributing guaranteed income from a lump sum. This calculator focuses on the accumulation phase: it projects the future value of fixed monthly contributions compounded at a steady annual growth rate over a set number of years.
What distinguishes an annuity from a generic investment account is its purpose. Annuities are built around the idea of predictable, contractually defined income streams rather than open-ended portfolio growth. During the accumulation phase, you contribute the same amount every month and the contract credits interest at a rate defined in the agreement. A deferred annuity extends this phase, pushing the payout date into the future so contributions have longer to compound before the income stream begins.
The calculator assumes contributions are made at the end of each month (an ordinary annuity) and that the annual growth rate is compounded monthly. It does not account for contract fees, surrender periods, or tax treatment—all of which can materially affect real-world outcomes.
The formula
FV = P × [((1 + r)^n − 1) / r]
Where:
- FV = future value of the annuity
- P = monthly contribution
- r = monthly growth rate (annual rate ÷ 12)
- n = total number of months (years × 12)
Worked example
To see how a lump sum converts into a guaranteed income stream—the core purpose of an annuity—consider a retiree who uses a $100,000 lump sum to purchase a fixed annuity paying out over a 20-year retirement period.
The annuity contract specifies a 5% annual payout rate. The goal is to determine the fixed monthly payout the contract will deliver.
Step 1: Identify the inputs
| Variable | Value |
|---|---|
| Present value (lump sum) | $100,000 |
| Annual payout rate | 5% |
| Monthly rate (r) | 0.05 ÷ 12 = 0.004167 |
| Total months (n) | 20 × 12 = 240 |
Step 2: Calculate the monthly payout
The payout formula rearranges the present-value-of-an-annuity relationship:
PMT = PV × r / (1 − (1 + r)^−n)
Plugging in the numbers:
- PMT = $100,000 × 0.004167 ÷ (1 − (1.004167)^−240)
- PMT = $416.67 ÷ (1 − 0.3724)
- PMT = $416.67 ÷ 0.6276
- PMT ≈ $663.80 per month
Step 3: Interpret the result
Over 20 years, the retiree receives $663.80 every month, totalling $159,312 in gross payments. The $59,312 difference between total payouts and the original $100,000 represents the interest credited by the annuity contract over the payout period.
This is fundamentally different from accumulation-phase growth tools. A future-value or investment calculator projects what your savings become; this annuity calculation shows what a lump sum converts into—a guaranteed income stream designed to last a defined period.
Things to watch
Annuity contracts vary significantly. Fixed annuities guarantee both the rate and the payout, making the math predictable. Variable and indexed annuities tie returns to market performance, so actual payouts can differ from projections. Watch for surrender periods that lock your money for several years, and check whether payouts are for a fixed term, for life, or joint-life with a spouse. Tax treatment also differs: qualified annuities (funded with pre-tax money) are fully taxable as ordinary income on withdrawal, while non-qualified annuities tax only the earnings portion. This calculator provides a planning estimate, not professional advice—contract terms and tax rules can materially change real outcomes.