Understanding Annuity Accumulation
An annuity is a contract with an insurance company where you make payments (either a lump sum or periodic payments) in exchange for regular disbursements beginning either immediately or at some point in the future. This calculator focuses on the accumulation phase, where your money grows over time before payouts begin.
Key Concepts:
- Starting Principal: The initial amount you invest in the annuity.
- Additions/Contributions: Regular amounts you add to the annuity (annually and/or monthly).
- Contribution Timing:
- Beginning (Annuity Due): Contributions are made at the start of each period (e.g., start of the month/year). This generally results in slightly higher growth as contributions have more time to earn interest.
- End (Ordinary Annuity): Contributions are made at the end of each period. This is a common structure.
- Annual Growth Rate: The estimated average rate at which your annuity's value increases each year. For fixed annuities, this is a set interest rate. For variable or indexed annuities, this would be an estimated average return based on underlying investments (which carry market risk). This calculator assumes a fixed annual rate compounded according to the schedule view (annually or monthly).
- Time Period: The number of years your annuity accumulates value before payouts start.
- End Balance (Future Value): The total estimated value of your annuity at the end of the accumulation period.
- Total Additions: The sum of all contributions you made during the period.
- Total Return/Interest: The difference between the End Balance and the sum of your Starting Principal and Total Additions. This represents the growth from interest or investment returns.
- Tax Deferral: A major benefit of annuities is that investment earnings typically grow tax-deferred. You don't pay taxes on the growth each year; taxes are usually paid when you start receiving payouts. (Note: This calculator does not calculate taxes).
How Calculations Work:
This calculator simulates the growth month by month:
- It starts with the initial principal.
- For each month, it determines the monthly contribution and if an annual contribution applies (based on timing).
- Based on your timing selection (Beginning/End), it adds contributions either before or after calculating the month's growth.
- It calculates the growth (interest/return) for the month based on the derived monthly rate applied to the balance eligible for growth.
- It adds the growth to find the ending balance for the month, which becomes the starting balance for the next.
- This repeats for the total number of months.
- The schedule shows the breakdown of additions and returns contributing to the balance each period (monthly or aggregated yearly).
The chart always shows the final breakdown between the starting principal, total additions made, and total interest earned over the entire period.