Trying to estimate the future value of an annuity can feel overwhelming. Annuities are complex products, so figuring out how much yours will be worth may take some work. While you may feel inclined to trust growth projections in the annuity sales materials your advisor initially showed you, sales materials may not tell you the whole story.
If you’re investing for a long-term goal such as retirement, a child’s education or a dream home, it may be decades before you know the full impact of your investment decisions, which makes it important to carefully consider your investment choices. Estimating the future value of an annuity and its payments is important when comparing your annuity to other investment options. Fisher Investments created our convenient Annuity Calculator to help you estimate and better understand the value of an annuity and its future payments. Note that while we believe this calculator can be a helpful guide, it is for informational purposes and not intended to be a definitive source of information for your situation. Results can vary based on actual growth rate, annuity riders and more.
We created this tool to estimate various values of different annuity types, such as deferred, fixed, variable and indexed annuities. For example, it can estimate the average rate of return you could expect from a variable or equity-indexed annuity. The calculator can estimate several annuity metrics, including:
Keep in mind that these are all estimated values relying on numerous assumptions, including no premature withdrawals. Variable and equity-indexed annuity estimates are also less precise, as market movements could cause significant changes in the rate of return.
First calculate what the annuity’s starting value will be when you annuitize your investment. Simply put, starting value is the value of the annuity when you begin receiving payments.
The calculator estimates starting value after you enter Starting Principal, Annual Growth Rate, Annual Fee and Expense Rate and Growth Period/Years Until Retirement. Enter these values manually or use the sliders. When you click the “Calculate” button, the annuity’s starting value appears.
Interested in the calculations? The starting value is the starting principal (p), which is the amount you initially invested in the annuity, plus any compounded interest (C) from the beginning until the annuitization point.
The calculator uses the present value formula to calculate compound interest:
C = p[(1+i)n - 1]
Where is the nominal interest rate and n is the number of compounding periods. Variables and n are usually based on annual values, but can be quarterly or monthly depending on the annuity.
However, if you’re doing this yourself, don’t forget to deduct fees! These can include administrative fees, fund expenses for underlying funds, fees for optional riders and more. Fees can vary widely between annuities, and you’ll need to consult your annuity contract to determine the applicable fees. Also note that fees in underlying funds are managed by a third party and can change over time. These can diminish your actual return. Our calculator factors in fees automatically. But if you do these calculations on your own, calculate by subtracting the percent lost to fees from the percentage of annual growth.
The next step is to calculate the amount of each payment (P) when you begin to receive them.
The calculator uses the following formula:
SV is the starting value of the annuity, which we calculated above. Normally, the annuity provider determines the number of payout periods, represented by n. In this equation, represents the interest rate. Payouts are likely to be monthly, so be sure to adjust from years to months if calculating by hand. You may also need to adjust your calculations if your annuity provides increasing payouts. Note that the calculator presents all payments in a given year in total as “Estimated Annual Income.”
Once again, the calculator will automatically do this for you when you input the data for Withdrawal Period/Years of Retirement Need and Annual Growth Rate During Withdrawal Period and click “Calculate.”
Now that you have calculated the amount of your periodic payment, you can use this information to determine what the future value of your annuity will be at any point in time. The final ending value (FV) is the sum of all payments received, plus any compound interest that continues to accrue and increase those payments over time.
Here is the underlying formula:
Where P is the periodic payment calculated in the previous step, represents the nominal interest rate applied to the principal during the payout period and n is the number of payout periods since annuitization.
Our calculator simply looks to the end of the retirement period you designate, and assumes you’ll want to withdraw the full starting value of your annuity. Your calculations may vary depending on your actuarial assessment (how long the insurer expects you to live), longevity, payments, total withdrawals and final value.
Knowing the final ending value of the annuity is crucial for several reasons. It allows you to compare the return you could receive from the annuity to other investments vehicles. Also, it can give you a rough estimate of whether or not your heirs will be able to receive a death benefit payout. To calculate this, you can subtract the future value at the time in question from the starting value of your annuity, since death benefits are typically reduced by the amount the annuity that has paid out. The remaining value would be the death benefit payout. Note, this number could be negative if you have outlived the insurance company’s actuarial assessment or have advantageous riders in your annuity. This usually means your annuity won’t pass anything on.
When allocating investment funds, it is crucial to understand all your available options and the pros and cons of each. Perhaps one of the most powerful things our calculator can do for you is highlight the impact that fees can have on an annuity, which often limit their growth potential over time.
Many investors make the mistake of only looking at the future value of an annuity when evaluating it as an investment. But there are many other important factors to consider, like how they can limit access to deposits and are often difficult to exit if other, more lucrative opportunities arise. Whether you already own one or are thinking about adding one to your portfolio, Fisher Investments’ annuity guides can provide more information on other important aspects to consider.
We also offer an annuity evaluation program for qualified investors to help them understand the specifics of a particular annuity. Our Annuity Counselors can scour your annuity’s contract and decode it for you, providing a clear explanation of its features and fees. Our hope is that hearing a straightforward, external analysis can help you make an informed decision about whether an annuity is the best way for you to reach your investing goals.