Variable Annuity Calculator

A variable annuity is a complex financial product, often positioned as a retirement investment. It offers tax-deferred growth potential by allowing you to invest in a portfolio of sub-accounts, similar to mutual funds. Our Variable Annuity Calculator is designed to demystify these products by projecting their potential future value and, most importantly, highlighting the significant impact of fees.

How a Variable Annuity Works

A variable annuity has two main phases:

1. Accumulation Phase: This is the period when you are funding the annuity, either with a lump sum or regular contributions. Your money is invested in sub-accounts you choose, and it grows tax-deferred. This means you don’t pay taxes on investment gains until you start taking withdrawals.
2. Payout Phase: After a certain period, you can start receiving payments from the annuity. The payment amount can be fixed or can vary based on the performance of your underlying investments.

Our calculator focuses on the accumulation phase, showing how your investment might grow over time.

The Impact of Fees

Variable annuities are known for their high fees, which can significantly reduce your net returns. This calculator visualizes that impact. Common fees include:

• Mortality and Expense (M&E) Risk Charges: This fee compensates the insurance company for the risks it assumes, including the death benefit feature. It typically ranges from 1.00% to 1.50% annually.
• Administrative Fees: These cover the costs of record-keeping and other administrative tasks.
• Underlying Fund Expenses: Each sub-account (investment fund) within the annuity has its own expense ratio, just like a mutual fund.
• Rider Fees: Optional features, like guaranteed minimum income benefits or enhanced death benefits, come with additional annual fees.

The "Total Annual Annuity Fees" in our calculator is meant to be an all-encompassing percentage representing the sum of these costs. The chart powerfully illustrates the difference between your portfolio's growth with and without these fees, showing the "opportunity cost" of the annuity structure.

Example Calculation

Let's use the calculator's default values:

• Initial Investment: $100,000
• Monthly Contribution: $500
• Years to Grow: 20
• Assumed Annual Return: 7%
• Total Annual Fees: 2.5%

The calculator first determines the net annual return by subtracting the fees from the gross return (7% - 2.5% = 4.5%). It then uses this net rate to compound your investment's growth monthly, adding your contributions along the way. Simultaneously, it runs a parallel calculation without fees to show the potential growth in a lower-cost investment vehicle like an index fund ETF. The difference, labeled "Total Fees Paid," represents the long-term cost of the annuity's features and structure.