Variable Annuity Calculator

Understanding Variable Annuities

A variable annuity is a contract between you and an insurance company designed to help you accumulate assets for retirement and later provide a steady stream of income. Unlike fixed annuities, a variable annuity allows you to invest your money in various subaccounts (similar to mutual funds), meaning your returns and overall balance will fluctuate depending on the performance of those investments.

The Accumulation Phase and Fee Drag

During the accumulation phase, your initial investment and subsequent contributions grow tax-deferred. However, variable annuities are notorious for their high fee structures, which can include:

• Mortality and Expense (M&E) Charges: Insurance guarantees.
• Administrative Fees: Record-keeping and maintenance costs.
• Underlying Fund Expenses: Fees charged by the subaccount managers.

These fees can easily total \(2.0\%\) or more annually. The drag of these fees on your return rate is significant.

If your expected gross annual investment return is \(R\) and your annual fee ratio is \(F\), your net annual return rate is:

For annual compounding, the balance at the end of year \(t\) is calculated as:

Where:

• \(B_t\) is the ending balance of the current year.
• \(B_{t-1}\) is the ending balance of the previous year (starting with the initial investment \(B_0\)).
• \(C\) is the annual contribution.

The Payout Phase (Annuitization)

When you choose to transition to the payout phase, your accumulated balance is converted into a series of periodic payments. The payment amount \(PMT\) is calculated using the present value of an annuity formula:

Where:

• \(PV\) is the total accumulated post-fee balance.
• \(r\) is the periodic interest rate (payout annual return rate divided by 12 for monthly payments).
• \(n\) is the total number of payout periods (payout duration in years multiplied by 12).