Retirement Annuity Calculator: How it works

The Annuity Man

In my opinion, annuities should not be looked at as investments.  They are contracts issued by life insurance companies.  Don’t believe me, then buy one and you will receive a contract (i.e. policy) in the mail.

Deciding to use a Retirement Annuity Calculator or some type of retirement planning calculator to plan for exact contractual numbers is a smart move because annuities should be owned solely for their contractual guarantees.  However, to broadly ask questions like what is an annuity’s “rate of return” or what “annuities pay” is an exercise in futility.  More details are needed to accurately provide the correct answer, so let’s look at what type of information you will need to plug into a Retirement Annuity Calculator to find the best contractual guarantees for your specific situation.

Lifetime Income Calculator

The most asked question that I receive is “How much does a $100,000 annuity pay per month?”  There’s no acceptable response to that question because the contractual answer is dependent upon specific details about you and how you want the retirement income to be structured.

Some of the details needed are date(s) of birth, state of residence, the lump sum dollar amount or the exact payment amount or monthly payment you are trying to contractually achieve.  You also need to provide when you want the income payment to start and if you want the guarantee to be for one life or joint life.  You also need to decide if you want the policy beneficiaries to receive any unused money.  And just to pile on a little, COLA (Cost of Living Adjustment) increases to the income stream can be attached to the policy at the time of application, but will lower the payout when compared to the same annuity without a COLA.  By the way, all of those variables affect the guaranteed payment.

Lifetime income annuity products are Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), and Qualified Longevity Annuity Contracts (QLACs). Income Riders attached to some deferred annuities also provide a lifetime income and needs its own special calculator as opposed to the one you would use with SPIAs, DIAs, and QLACs.

If you are looking for an income for life guarantee, you need to find an annuity calculator that shops all carriers for the best payout.  Income annuities are primarily based on your life expectancy(s) at the time you start the payments, with interest rates playing a secondary role.  Also, annuity income (regardless of type) is a combination of return of principal plus interest.  The true benefit proposition of an annuity lifetime income guarantee is when the account is at zero and you have outlived your projected life expectancy.  That annuity company is still on the hook to pay regardless of how long you live.

Fixed Term Income Calculator

Not all guaranteed income payments have to be for life.  You can contractually structure the payment for a specific period of time or number of years.  For example, if you just wanted to guarantee payments for 20 years, the annuity structure that you would need to quote would be a “20 Year Period Certain” annuity.  You can choose any year duration for the period certain quote, and carriers will bid on that guarantee.

There are no date(s) of birth needed, because the guarantee is only for a specific period of time. With this type of fixed term quote, the pricing is 100% interest rate based.  The only additional detail needed is when you want the payments to start.

The same annuity calculator that you would use for SPIAs, DIAs, and QLACs can typically be used for fixed term quotes as well.

Principal Protection Calculator

Not all annuity types are structured for a lifetime or period certain income stream.  Some are designed for pure principal protection.  For example, Multi-Year Guarantee Annuities (MYGAs) are the annuity industry’s version of a CD (Certificate of Deposit).  MYGAs are fully principal protected and provide a contractually guaranteed interest rate for a specific period of time that you choose.

MYGAs fall under the category of fixed annuities, and when used in a non-IRA type account...the annual interest grows tax deferred.  MYGAs can be used in any type of account (IRA, Roth IRA, non-IRA), and the guaranteed interest is contractually the same. Most legitimate annuity calculators for principal protection filter the strategy by your state of residence and by yield to maturity (i.e. annual guaranteed yield for the term).  Your state of residence is important because all fixed annuities are regulated and approved at the state level.

Another deferred annuity type that provides principal protection is a Fixed Index Annuity (FIA). It’s also a CD return product, but the return portion is attached to an index call option that is not guaranteed.  In other words, you can’t lose money...but you can also not make any if the call option expires worthless. It’s all about “potential” with FIAs, which is a license for too many agents to over-hype the strategy.

There is no legitimate calculator for FIA returns, and there shouldn’t be in my opinion. Hypothetical, theoretical, back-tested, projected, or hopeful agent return scenarios should never be the basis to buy an annuity.

Guaranteed vs. Non-Guaranteed Returns

In my opinion, you should own annuities for what they will do (i.e. contractual guarantees)...not what they might do.  My Annuity Man hats and t-shirts all have the “Will Do. Not might do” saying embroidered or screen printed on them to be easily seen.

I don’t sell Variable Annuities (VAs) because I only recommend contractual guarantees. That doesn’t mean VAs are bad products or that I don’t like them.  They just don’t fit my “contractual guarantees only” mantra. VA returns are attached to separate accounts (i.e. mutual funds) and are not guaranteed.  Fixed Index Annuities (FIAs) also have no guarantees on that index option as explained previously.  Because of this, there are no calculators that should be considered for VAs or FIAs in my opinion.

“Annuity” = Many Types

As you are now aware, there are many types of annuities that might contractually fit into specific retirement plans.  There is not just one annuity contract type which means there’s not just one annuity calculator.  There is nothing “one size fits all” when it comes to the annuity category.

Before purchasing an annuity or deciding to use an annuity calculator, you need to ask and answer 2 simple questions:

  1. What do you want the money to CONTRACTUALLY do?
  2. When do you want those CONTRACTUAL guarantees to start?

From those two basic answers, you will then be able to pinpoint the type of annuity you need and the type of annuity calculator to use in order to find the highest contractual guarantee for your specific situation.

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