Retirement Planning
Published on September 10, 2025
An annuity is a series of equal payments made at regular intervals. Its future value is FV = PMT x (((1 + r)^n - 1) / r), where PMT is the payment, r is the rate per period, and n is the number of periods. Paying $500 a month for 20 years at 8% builds $294,510, of which $120,000 is money you paid in and $174,510 is growth.
Published by PraxisCalc, a Zeta Digilux Labs project
As you approach retirement, one of the primary financial goals is to convert your accumulated savings into a reliable stream of income that can last for the rest of your life. An annuity is a financial product specifically designed to help achieve this goal.
An annuity is a contract between you and an insurance company. In its simplest form, you make a payment (or a series of payments), and in return, the insurer agrees to make periodic payments to you for a specified period or for the rest of your life. This creates a predictable income stream, which can be a cornerstone of a secure retirement plan.
See how your regular payments can grow into a substantial sum. Use our Annuity Calculator to estimate the future value of your investment.
Use the Annuity Calculator →The growth of an annuity during the accumulation phase can be calculated with the future value formula for an ordinary annuity:
FV = P * [((1 + r)^nt - 1) / r]
Where:
Annuities can be a great tool for those seeking a guaranteed income stream in retirement and who are concerned about outliving their savings. However, they can also come with fees and may have less liquidity than other investment products. It's essential to understand the terms of any annuity contract and consider how it fits into your overall financial plan. Consulting with a financial advisor is always recommended.
Before choosing an annuity, compare three things: the payout you need, the flexibility you want, and the fees you are willing to accept. Fixed annuities can provide predictable income, while variable annuities depend more on market performance. If your goal is retirement income, estimate the future value of your savings first, then compare the monthly payout against other retirement income sources.
Use the Annuity Calculator to model payout assumptions, then compare your broader retirement target with the Retirement Calculator.
An ordinary annuity makes each payment at the end of the period (a typical bond coupon or a standard loan payment), while an annuity due makes each payment at the beginning of the period (rent and most insurance premiums work this way). The timing difference matters for the math: because each payment in an annuity due starts earning or accruing one period earlier, its future value is always slightly higher than an otherwise-identical ordinary annuity, specifically by a factor of (1 + rate) per period. When you're calculating a future value, confirm which structure applies to your situation, since assuming end-of-period payments for a beginning-of-period obligation will consistently understate the true future value.
Commercial annuity products, particularly variable and indexed annuities sold by insurance companies, often carry layered fees: a mortality and expense charge, administrative fees, fund-level expense ratios for the underlying investment options, and rider fees for optional guarantees. These combined costs can run well above 2% annually in some products, which meaningfully erodes returns compared to a comparably invested low-cost index fund. Most annuity contracts also impose a surrender charge, a penalty for withdrawing more than a small percentage of the account value within the first several years of the contract, so read the surrender schedule carefully before committing funds you might need access to sooner than the contract allows.
One genuine advantage of certain annuity types, particularly a lifetime income annuity, is that they can guarantee income for as long as you live, transferring the risk of outliving your savings to the insurance company rather than leaving it entirely on your own portfolio. This "longevity risk" protection is difficult to replicate with a self-managed portfolio alone, since no one knows in advance exactly how long they'll need income to last. This benefit needs to be weighed against the fees and reduced liquidity discussed above; it's most valuable for someone specifically worried about running out of money in a long retirement, rather than as a default choice for every saver.
For official guidance on this topic, see the SEC's investor education glossary.
FV = PMT x (((1 + r)^n - 1) / r). For monthly payments, r is the annual rate divided by 12 and n is the number of months. $500 a month at 8% for 20 years gives r = 0.006667 and n = 240, producing $294,510.
Work out the rate per period and the number of periods first, then apply the formula. The common error is mixing an annual rate with a monthly period count, which massively overstates the result.
An ordinary annuity pays at the end of each period, an annuity due pays at the start. An annuity due is worth more because every payment compounds for one extra period. Multiply the ordinary result by (1 + r) to convert.
Multiply the payment by the number of periods to get what you contributed, then subtract that from the future value. In the example above $120,000 was paid in and $174,510 came from compounding, so growth is roughly 59% of the ending balance.
Use a rate you can defend for the asset involved, then test a lower one. Dropping the example from 8% to 6% cuts the ending balance to about $231,000, which shows how much of the projection depends on the return assumption rather than the contributions.
This formula values a stream of payments you make. A retirement annuity product is a contract that pays you an income, usually for life, and its pricing includes the provider's fees and mortality assumptions. The two are related but not interchangeable.
For faster estimates, open the annuity calculator and test the numbers with your own assumptions.
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