Index Annuity Calculator

Use this calculator to determine a final balance for equity index annuities. Indexed annuities track a market index like the S&P 500 and calculate earnings based on one of three models: annual reset, high water mark, or point-to-point. For traditional annuity calculations, see our Deferred or Immediate annuity calculator.

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*Results shown are estimates only and should not be confused with actual product performance.
Past performance does not guarantee future performance.

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About

The above calculator is good for estimating final balances for index annuities. Most index annuities are also deferred annuities, but use a different accumulation model. Factors such as cap rate, the minimum guarantee, and participation rate necessitate a calculator specific to index annuities.

How This Calculator Works

Index annuities lend themselves well to historical back-testing, which is what this calculator does. Rather than choosing an arbitrary, average rate of return, we find it more instructive to see how an index annuity with specific contract terms would have performed in the market 5, 10, or 20 years ago.

The above calculator estimates an index annuity's performance using historical S&P 500 performance data. Specify the initial investment and the range of years you'd like to see comparisons for. The calculator then plots your hypothetical annuity account along side a direct S&P 500 investment.

This calculator graphs two data sets: 1) S&P 500, and 2) Annuity Account. The S&P 500, shown in green, is plotted based on historical S&P 500 index values; these values are converted into dollar amounts based on the investment amount you specify. This is done to make comparison easier. Your index annuity performance is shown in orange and reflects the S&P 500 performance modified by the minimum rate, cap rate, participation rates, and miscellaneous factors such as tax adjustment.

For more information on how index annuities work, see Index Annuity Guide.

Instructions

Fields

Investment — The amount you are investing up front in the index annuity. Also known as the premium. For an apples-to-apples comparison, this amount will be used as the starting point for the S&P 500 account as well.

From — The start year of the time span you wish to see plotted.

To —The end year of the time span you wish to see plotted.

Min Rate — The minimum rate of return specified in the index annuity contract. This rate is used as a floor; on years when the S&P 500 dips into negative territory your annuity is credited this minimum rate.

Cap Rate — The maximum rate of return specified in the index annuity contract. This rate is used as a ceiling, minus participation. Most index annuities cap returns in order to offset losses in negative years, for which the insurance company is liable. Annual Reset annuities typically come with lower caps.

Participation — The percentage of earning credited to the annuity owner's account; the rest goes to the insurance company. Higher participation rates are common for High Water Mark and Point-to-Point models. Annual Reset usually comes with a lower participation rate.

Crediting Models

Annual Reset — Interest is calculated year by year, taking the difference between the current and previous year. This ratcheting model insures that pervious years' gains cannot be lost, and interest accumulates yearly.

High Water Mark — Interest is calculated at the end of the contract term by taking the difference between the value of the S&P 500 at the beginning and its highest point. In this model, interest is credited to the account only once, at the very end.

Point-to-Point — Interest is calculated at the end of the contract term by taking the difference between the value of the S&P 500 at the beginning and end points. In this model, interest is credited to the account only once, at the very end.

Checkboxes

Inflation Adjustment — Check this box to adjust balance calculations for inflation. Enter an average expected inflation rate for the duration of the contract. 3% is realistic.

Conclusions

  1. An index annuity always smoothes out the performance of the equity index it tracks: highs aren't as high, lows aren't as low.
  2. Index annuities produce substantially higher returns than direct S&P 500 investment when the contract ends in a recession year. Compare a $50,000 investment from 2003 to 2009. That's because the chief advantage of index annuities is to protect against severe downturns.
  3. A direct S&P 500 investment will outperform an index annuity during spans of consistently positive market performance. This makes sense, given that an index annuity is designed to insure against market downturns at the cost of lower returns during positive years.
  4. The difference between an index annuity and a direct S&P 500 investment is greatest during spans of consistently negative market performance. An index annuity never goes gets dragged into the red by market performance alone. Note: inflation and management fees can produce a slightly negative return during such years.
  5. Over long stretches of time (10+ years) inflation — even at 2% — will eat away over half of your account's buying potential.
  6. The final year for a high water mark or point-to-point graph jumps because in these models, interest rate is credited at the very end. This jump is counter-balanced by with taxes when assuming when assuming 100% liquidation at the of the term. This is the result of the back-loaded nature of annuity taxation.
  7. Returns for index annuities are not predictable, hence they are not ideal if your retirement plan calls for a specific balance at a specific date; a fixed annuity is better for those purposes. On the other hand, index annuities can yield far greater returns than fixed annuities.
  8. Although an index annuity can't promise a guaranteed final balance, it does at least insure against losing substantial capital, as might be possible with a variable annuity.

Keep in mind that the above calculations are merely estimates based on past S&P 500 performance. For an actual rate report of the most competitive annuities in today's market, contact a licensed specialist. Request a FREE Report.