Annuities are the most misunderstood product in personal finance. Sold aggressively by commissioned agents and dismissed reflexively by DIY investors, the truth sits in the middle: some annuities are genuinely excellent (fixed immediate, QLACs) and some are genuinely terrible (indexed and variable with 3% fees and 10-year surrender charges). Understanding the math separates the products that transfer real risk from the products that transfer real fees.

The core idea of an annuity is elegant. An insurance company pools thousands of retirees, invests their premiums, and pays each a guaranteed income stream for life. Retirees who die early subsidize those who live longer — this 'mortality credit' is why annuities can safely pay higher income than any individual portfolio's safe withdrawal rate. A 65-year-old buying a Single Premium Immediate Annuity (SPIA) today gets roughly 6–7% annual income for life, versus 4% from a self-managed portfolio.

Fixed immediate annuities (SPIAs) are the crown jewel of the category. You hand the insurer a lump sum; they pay a fixed monthly amount for life (or joint life). No fees, no market risk, no decision fatigue. The tradeoff: no liquidity — that money is gone. Rule of thumb: annuitize 25–40% of retirement savings for base income floor, keep the rest invested for growth and legacy. Combined with Social Security, a SPIA can cover essential expenses so market volatility never threatens groceries.

Deferred annuities delay payments to a future date. The valuable version is a QLAC — Qualified Longevity Annuity Contract. Up to $200,000 (2024 limit) of your IRA can buy a deferred annuity starting as late as age 85. Benefits: (1) that $200k is excluded from RMD calculations 73–85, (2) payments starting at 85 are enormous per dollar because insurers price in significant mortality, (3) it's true longevity insurance against outliving your money.

Variable annuities are where the industry gets its bad reputation. A variable annuity wraps mutual-fund-like subaccounts inside an insurance product. Total annual fees often reach 3% (mortality expense + subaccount + rider). Surrender charges of 7–10% for 7–10 years lock you in. The tax-deferral benefit is real but usually not worth 3% fees when Roth IRAs and taxable brokerages exist. Rule: buy variable annuities only if you've maxed every other tax-advantaged account and can't stand market volatility.

This calculator handles both phases: accumulation (contributions growing to a corpus) and payout (corpus being drawn down as income). Model different scenarios — ordinary vs annuity-due, monthly vs annual, different rates. Combine with our 401(k) Retirement Calculator and Compound Interest Calculator to see how annuities fit into the full retirement stack. Rule of thumb: never buy an annuity from the first agent who mentions one, and never buy one without running the math yourself first.