An annuity is like a pension in that it pays a fixed monthly amount over time. For that benefit you have to pay an upfront premium. Most annuities aren’t inflation adjusted so the value of future payments may erode under a high inflation scenario. Some annuity providers will offer an inflation feature but it will come at a cost.
We estimate the current value of the annuity using an assumed interest rate (AKA a discount rate). The discount rate is the rate used to convert future dollars into today’s dollars. The total discount rate is the risk-free rate + risk premium. You can use our fixed income dashboard to get proxies for these rates. We recommend using 30-year treasuries as the risk-free rate and the single-A corporate rate as the risk premium. Most annuity providers are highly rated and we think a Single-A risk is a good proxy (AAA is risk free, like the government or strongest companies and anything below BBB is considered high risk). Remember to always ask for the credit rating (ranging from AAA to Single-B) of your annuity provider. Annuities entail some long-term risk to the annuity provider.
An annuity pays a fixed monthly amount over time in exchange for an upfront premium, similar to a pension. This calculator estimates the current value of that stream of future payments using an assumed discount rate, so you can judge whether the premium being asked is reasonable.
The discount rate used to convert future annuity payments into today's dollars is the risk-free rate plus a risk premium. We suggest using the 30-year treasury rate as the risk-free rate and a single-A corporate rate as the risk premium, both of which you can look up on the Fixed Income Dashboard.
Annuities carry long-term counterparty risk — you're relying on the provider to make payments decades into the future. A stronger credit rating (closer to AAA) implies lower default risk, while ratings below BBB are considered high risk, which is why it's worth always asking for the provider's rating before buying.
Not usually — most annuities pay a fixed amount that isn't adjusted for inflation, so the real value of future payments can erode over time. Some providers offer an inflation-adjustment feature, but it typically comes at an additional cost.
The Fixed Income Dashboard provides the rate benchmarks used in the discount-rate calculation, while the Retirement Calculator and Social Security Calculator help you see how an annuity fits into your broader retirement income picture.
