Deferred Annuity Calculator
Calculate deferred annuity growth and future income. Compare fixed, indexed, and variable annuity options with accumulation projections and income rider benefits.
Related Calculators
About This Calculator
A deferred annuity allows you to save money on a tax-deferred basis and convert it to guaranteed income later. Unlike immediate annuities that start paying right away, deferred annuities have an accumulation phase during which your money grows, followed by a distribution phase when you take income. They're popular for retirement planning due to their tax advantages and various protection features.
Types of Deferred Annuities:
- Fixed Annuities: Guaranteed interest rate for a set period
- MYGA (Multi-Year Guaranteed Annuity): Fixed rate locked for multiple years
- Fixed Indexed Annuities (FIA): Returns linked to market index with downside protection
- Variable Annuities: Invested in market subaccounts with potential for higher returns
Key Features of Deferred Annuities:
- Tax-deferred growth (no annual taxes on gains)
- No contribution limits (unlike IRAs/401ks)
- Principal protection (fixed types)
- Optional income riders for guaranteed lifetime income
- Death benefits for beneficiaries
Who Benefits from Deferred Annuities:
- Those who have maxed out other retirement accounts
- Pre-retirees seeking guaranteed future income
- Conservative investors wanting principal protection
- High earners wanting additional tax deferral
Considerations:
- Surrender charges for early withdrawals
- 10% penalty on gains withdrawn before age 59½
- Fees can be high, especially on variable annuities
- Limited liquidity compared to other investments
This calculator helps project deferred annuity growth and income. For immediate income needs, see our Immediate Annuity Calculator. For retirement planning, visit our 401(k) Calculator.
How to Use the Deferred Annuity Calculator
- 1Enter your initial premium (lump sum investment).
- 2Select the annuity type (fixed, MYGA, indexed, or variable).
- 3Enter the expected annual interest rate.
- 4Input the number of years until you need income.
- 5Add any planned annual contributions (if applicable).
- 6Enter your current age for income planning.
- 7Optionally enable income rider to project guaranteed income.
- 8If using income rider, enter rollup rate and income start age.
- 9Review projected account value and growth.
- 10Compare income projections if using income rider.
Types of Deferred Annuities
Understanding the different types helps you choose the right one for your needs.
Fixed Annuities
How They Work:
- Insurance company declares interest rate
- Rate may reset annually
- Principal and interest guaranteed
- Minimum guaranteed rate (floor)
Current Rates (2024):
| Term | Typical Rate Range |
|---|---|
| 1 Year | 4.0-5.0% |
| 3 Years | 4.5-5.5% |
| 5 Years | 4.5-5.5% |
Best For: Conservative investors wanting guarantees
MYGA (Multi-Year Guaranteed Annuity)
How They Work:
- Rate guaranteed for entire term (3-10 years)
- Similar to bank CD but tax-deferred
- No annual rate resets
- Simple and transparent
Current Rates (2024):
| Term | Typical Rate Range |
|---|---|
| 3 Year | 5.0-5.5% |
| 5 Year | 5.0-5.5% |
| 7 Year | 4.8-5.3% |
Best For: CD alternative with tax deferral
Fixed Indexed Annuities (FIA)
How They Work:
- Returns linked to market index (S&P 500, etc.)
- Principal protected from market losses
- Caps and participation rates limit gains
- Floor of 0% (never negative)
Return Components:
| Feature | Typical Range |
|---|---|
| Cap | 6-12% |
| Participation Rate | 40-100% |
| Spread | 1-3% deducted |
Best For: Growth potential with downside protection
Variable Annuities
How They Work:
- Invested in market subaccounts
- Full market participation (up and down)
- No guarantees on principal
- Highest fee structures
Typical Fees:
| Fee Type | Typical Range |
|---|---|
| M&E (mortality/expense) | 1.0-1.5% |
| Fund expenses | 0.5-1.5% |
| Admin fees | $25-50/year |
| Optional riders | 0.5-1.5% |
Best For: Growth-oriented investors comfortable with risk
Income Riders Explained
Income riders guarantee lifetime income regardless of account value.
How Income Riders Work
Two Separate Values:
- Account Value: Your actual money (can be surrendered)
- Income Benefit Base: Calculation basis for income (not withdrawable)
Key Features:
- Rollup rate increases income base during deferral
- Income rate determines withdrawal percentage
- Income guaranteed for life, even if account value depletes
Rollup Rates
How Rollup Works:
- Income benefit base grows at rollup rate annually
- Continues until you start taking income
- Not the same as actual account growth
Example:
- Initial premium: $100,000
- Rollup rate: 6% compound
- After 10 years: $179,085 income benefit base
- Income rate at 65: 5%
- Annual income: $179,085 × 5% = $8,954
Income Rates by Age
| Age at Income Start | Typical Income Rate |
|---|---|
| 60 | 4.0-4.5% |
| 65 | 4.5-5.5% |
| 70 | 5.5-6.0% |
| 75 | 6.0-6.5% |
| 80 | 6.5-7.0% |
Rider Costs
Typical Annual Fees:
- Basic income rider: 0.75-1.00%
- Enhanced income rider: 1.00-1.50%
- Charged against account value
- May reduce surrender value
Surrender Charges and Liquidity
Understanding surrender charges is critical before purchasing.
Typical Surrender Schedule
| Year | Surrender Charge |
|---|---|
| 1 | 8-10% |
| 2 | 7-9% |
| 3 | 6-8% |
| 4 | 5-7% |
| 5 | 4-6% |
| 6 | 3-5% |
| 7 | 2-4% |
| 8 | 1-2% |
| 9+ | 0% |
Free Withdrawal Provisions
Most Annuities Allow:
- 10% of account value annually
- Penalty-free after surrender period
- Nursing home waiver (some policies)
- Terminal illness waiver
Market Value Adjustment (MVA)
What It Is:
- Additional charge or credit if interest rates change
- If rates rise, surrender value decreases
- If rates fall, surrender value increases
- Common in MYGAs and FIAs
Liquidity Considerations
Questions to Ask:
- How much can I access penalty-free?
- What are the surrender charges?
- Is there an MVA?
- Are there nursing home provisions?
- What about terminal illness?
Tax Treatment of Deferred Annuities
Annuities offer tax advantages but also have unique tax rules.
Tax-Deferred Growth
During Accumulation:
- No annual tax on interest/gains
- Compounds without tax drag
- No 1099 until withdrawal
- Benefits highest tax bracket investors most
Withdrawals: LIFO Taxation
Last-In, First-Out Rule:
- Gains withdrawn first (taxable)
- Principal withdrawn last (tax-free)
- Opposite of most investments
Example:
- Invested: $100,000
- Current value: $150,000
- Gain: $50,000
- First $50,000 withdrawn is 100% taxable
10% Early Withdrawal Penalty
Before Age 59½:
- IRS 10% penalty on gains
- In addition to ordinary income tax
- Some exceptions (death, disability, annuitization)
Annuitization Tax Treatment
If You Annuitize:
- Exclusion ratio applies
- Part principal (tax-free), part gain (taxable)
- Spreads tax liability over payments
- More favorable than lump sum withdrawal
Non-Qualified vs. Qualified
| Type | Contributions | Growth | Withdrawals |
|---|---|---|---|
| Non-Qualified | After-tax | Tax-deferred | Gains taxed |
| Qualified (IRA) | Pre-tax | Tax-deferred | 100% taxed |
Comparing Annuities to Other Investments
Annuities have unique features that may or may not suit your needs.
Annuity vs. 401(k)/IRA
| Feature | Annuity | 401(k)/IRA |
|---|---|---|
| Contribution limits | None | Yes |
| Employer match | No | Possible |
| Tax deduction | No (NQ) | Yes (Trad) |
| Investment choices | Limited | Broad |
| Fees | Higher | Lower |
| Guarantees | Available | None |
| Required distributions | No (NQ) | Yes at 73 |
Annuity vs. Bonds/CDs
| Feature | Annuity | Bonds/CDs |
|---|---|---|
| Tax treatment | Deferred | Annual |
| Liquidity | Limited | Variable |
| Principal protection | Yes (fixed) | Yes (FDIC) |
| Upside potential | Limited | Limited |
| Lifetime income | Available | No |
When Annuities Make Sense
Good Fit:
- Maxed out other tax-advantaged accounts
- Want guaranteed lifetime income
- Need principal protection
- Long time horizon (10+ years)
- High tax bracket (benefits from deferral)
Poor Fit:
- Need liquidity within 5-7 years
- Haven't maxed 401(k)/IRA
- In low tax bracket
- Want full market participation
- Cost-sensitive investor
Choosing the Right Deferred Annuity
Key factors to consider when selecting a deferred annuity.
Questions to Ask
About the Product:
- What type of annuity is it?
- What are the guaranteed rates/floors?
- What are the caps/participation rates (indexed)?
- What are all the fees?
- How long is the surrender period?
About the Insurance Company:
- What's the financial strength rating?
- How long have they been in business?
- What's their claims-paying history?
Financial Strength Ratings
| Rating Agency | Good Ratings |
|---|---|
| A.M. Best | A or better |
| S&P | A or better |
| Moody's | A2 or better |
| Fitch | A or better |
Red Flags to Avoid
Warning Signs:
- Pressure to buy immediately
- Unclear fee disclosure
- Excessive surrender periods (15+ years)
- Company with low ratings
- "Too good to be true" returns
- Lack of written materials
Diversification Strategy
Consider:
- Splitting between multiple carriers
- Using different annuity types
- Laddering surrender periods
- Keeping liquid reserves outside annuities
Pro Tips
- 💡Only invest money you can lock up for 7-10+ years.
- 💡Compare products from multiple insurance companies.
- 💡Check the insurance company's financial strength rating (A or better).
- 💡Understand all fees - M&E, admin, rider, and fund expenses.
- 💡Read the surrender schedule carefully before purchasing.
- 💡Max out 401(k) employer match before buying non-qualified annuities.
- 💡Consider a MYGA for simple, guaranteed accumulation.
- 💡Income riders add cost - only pay for what you'll use.
- 💡Keep some liquid assets outside annuities for emergencies.
- 💡Work with a fee-only advisor for unbiased guidance.
- 💡Don't buy based on illustrated returns alone.
- 💡Consider tax implications - annuities don't get stepped-up basis.
Frequently Asked Questions
A deferred annuity is a contract with an insurance company where you make a lump sum payment or series of payments that grow tax-deferred during an accumulation phase. Later, you can take withdrawals, convert to guaranteed lifetime income (annuitization), or use an income rider for guaranteed withdrawals.
