How an Income Annuity Calculator Works

Written by Hersh SternUpdated Thursday, November 22, 2018

annuity calculator

If you are currently participating in a defined contribution plan, such as a 401K, you have complete control over the planning and management of your retirement savings, during both your working years and after you retire.

Studies have shown that participants in retirement plans who can view their account balances in the form of level monthly annuity payments for life are able to more accurately assess how ready they are for retirement and plan better.

On May 7, 2013 the Department of Labor (DOL) proposed a rule that would require pension plan benefit statements to show participants both the lump sum amount and an estimate of an annuity income stream for life. The annuity would be calculated using the most recent balance on the account as well as the projected value of the account at retirement age. Married participants would also see a joint income annuity stream as well as a survivor annuity.

These projections make use of an annuity income calculator. The calculator incorporates an annuitization method to correctly estimate monthly income for two levels of monthly payments. The first one projects the income stream for just the participant while the second one takes into account the joint life of a participant as well as a spouse being paid a fifty-percent survivor benefit.

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Simply enter your age, gender, select an income start date, and the dollar amount you have to invest. (If your want income paid over your and your spouse's lifetimes enter your spouse's age and gender, too.) Then click "Get My Quote." You'll instantly see an estimate of how much monthly income you can withdraw at your projected start date.

If you are in the market to purchase an immediate or a deferred income annuity be sure to get your free list of the top 10 quotes. By comparing rates you'll find the annuity with the highest income.

How it Works

An annuity calculator works by applying the following rules regarding inflation, future contributions, and earnings.

1. Contributions to the account will continue to retirement age at the same level. The amount goes up three percent each year.

2. Return on your investments is calculated at 7 percent per annum.

3. Inflation of three percent each year is applied which discounts the projected balance to today’s dollar value.

The annuity calculator uses the following assumptions when converting the balance into a monthly life annuity:

1. An interest rate set equal to a 10-year constant maturity treasury securities rate.

2. An Internal Revenue Code mortality rate is applied.

3. No insurance company loads for expenses or profit are applied.

Instructions For Using the DOL's Annuity Calculator

You can find the DOL's annuity calculator here.

You must fill in all fields for an accurate calculation.

1. Input your retirement age. While 65 is the norm, any age can be entered. If you are already retired use your actual age.

2. Enter the current balance of your account. Use the most current statement balance.

3. Input the annual contribution you are currently making to the account. Use the total amount contributed in the last twelve-month period. Investment earnings and losses should not be included in this figure.

4. Enter the number of full years until you plan on retiring. If you have already retired, enter zero in this section.

5. Enter the date of your last statement provided by your plan.

6. Once you have entered this information simply press calculate and the annuity income calculator will display a chart of your results.

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How to Read the Results

The first section of the chart displays the current balance of your account along with the monthly lifetime annuity payments you would be paid today. This is the amount you would receive if you were already retired and no other contributions were made to the account. This section also displays what your surviving spouse will be paid under survivor benefits.

The second section of the displayed results shows the projected balance of the account at the time of retirement. This total is comprised of the current balance plus the assumed contributions that will be made by you and your employer as well as investment earnings. The annuity calculator then discounts that amount into today’s dollars to arrive at the projected future account balance. This amount is converted to a monthly income payment.

It is important to remember that these numbers are estimates and there is no guarantee of this income. Additionally, insurance companies use different assumptions in arriving at life annuity calculations. To see an insurance company annuity quote use the calculator below.

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Comments (2)

  1. Paul:
    May 08, 2015 at 01:26 PM

    If a man age 60 buys a single life annuity for immediate monthly income, what portion of the income is taxable? I'm having trouble finding this answer. Thanks

  2. Hersh Stern:
    May 08, 2015 at 01:29 PM

    Hi Paul-

    There are several factors that go into determining the taxable portion of an immediate annuity income payment.

    First, there’s the tax status of the original premium. If your annuity was purchased with IRA or 401k monies then all the income you receive from it is taxable as received.

    If you bought your annuity with after-tax savings, then only a portion of each payment is taxable. The rest is considered a tax-free return of already taxed money.

    If you bought a single life annuity with $100,000 of savings at current interest rates (May, 2015) you’d receive around $500 a month. Of that amount around $150 would be taxable interest and $350 would be non-taxable return of principal. The taxable portion is based on your age and the IRS life expectancy tables, and interest rate credited to your premium by the insurance company.

    This taxable portion calculation is usually supplied by the insurance companies and we show it to you next to each company’s quote when you request a free comparison report at our website.

    Take care.

    Hersh