How to Understand & Calculate Annuity Interest Rates

So, you're interested in learning about interest rates for annuities for retirement and what your investment will bring you in the future. In this guide, you'll learn about various aspects of annuity interest rates, including the assumed interest rate of a variable annuity, how ordinary annuity interest rates are calculated, and even how to find the best fixed annuity interest rates.

In the end, having the right financial expert in your corner to guide you through the next steps is key. That's where independent insurance agents come in. These agents can explain more about an annuity's interest rate, how it's calculated, and how much you’ll receive during your payout phase. They know all the ins and outs of the annuity scene and can help make sure you're putting your money into the right investment for you. But first, use our guide to annuity interest rates to learn more about what you can expect to get back for your investment.

What Is the Assumed Interest Rate of a Variable Annuity Contract?

A variable annuity’s interest rate is also called the assumed interest rate (AIR). Insurance companies use the AIR to determine the value of an annuity contract. Ultimately, this affects the payouts you get from the insurer. The higher the assumed interest rate, the higher the payout for the policyholder.

Because insurance companies still need to meet profit margins and cover costs, the AIR is the minimum interest rate that must be earned on investments in the policyholder's account. Note that the AIR is not a guaranteed rate of return, hence the "assumed" part.

Instead, the assumed interest rate is an earnings "target" the insurer sets for the annuity. To maintain payment levels, the account must meet or exceed this earnings target. If performance falls below the AIR, payments will decrease during the payout phase of the annuity contract unless there are guaranteed minimum payouts already laid out in the contract.

Why the Assumed Interest Rate Is Important

The AIR is only relevant during the payout phase of the contract when the policyholder is getting their regular payments. As an investor, knowing the AIR plays a substantial part in planning for your retirement years, so you know how much you can expect to receive from an annuity that:

Provides security in non-working years
Is an estimate of funds available for further investments
Carries an expected tax liability when you intend to make withdrawals from the annuity

Next, we'll take a closer look at how the AIR is calculated so you can have a better understanding of your own.

What Factors Influence the Assumed Interest Rate?

There can be a number of key influences on how an assumed interest rate is determined, including:

The policyholder’s age when the annuity pays out, known as annuitization
Spousal coverage options
Policy riders, such as a death benefit
The type of annuity coverage chosen

All of these factors can influence your AIR. However, these factors may also vary from annuity to annuity.

Example of an Assumed Interest Rate

An annuity payment is based on the number of annuity units owned by the policyholder multiplied by the annuity unit value. The minimum guaranteed payment is tied to the assumed interest rate, so the policyholder can receive additional payments if the annuity's underlying assets outperform expectations.

As an example, assume a variable annuity where the policyholder receives a minimum guaranteed payout. An assumed interest rate of 4.5% on the account’s principal of $1 million would generate larger minimum payouts than an annuity performing at 2%. However, the insurer would still have to provide payouts at the assumed interest rate of 4.5%, even at lower AIRs.

How to Calculate the Interest Rate in an Ordinary Annuity

Here's what it takes to calculate the interest rate in an ordinary annuity. There are a few key variables to note:

A = Total accrued amount (principal + interest)
P = Principal amount
I = Interest amount
r = Rate of interest per year in decimal; r = R/100
R = Rate of interest per year as a percent; R = r * 100
t = Time period involved in months or years

Ultimately, to calculate the interest rate in an ordinary annuity, the equation is expressed as A = P(1 + rt).

How we arrived here:

First, we found the total accrued amount (principal + interest), which is A = P + I
Next, interest amount is expressed as I = Prt
Combining these formulas, we get A = P + Prt, which is simplified as A = P(1 + rt).

Because the interest rate of a variable annuity changes annually, it can be difficult to predict how much your annuity will ultimately pay out. But you can use the assumed interest rate to get a ballpark estimate of how much you’ll receive.

If you think this seems a bit complicated, you’re not alone. Thanks to the fact that many online calculators now exist and can be customized to your specific attributes, including your age, amount invested, etc., it’s no longer necessary to know how to calculate an annuity interest rate in Excel or do guesswork when it comes to your future finances.

Additionally, an independent insurance agent can help you fill in any gaps in your understanding and simplify your expected rates of return. They can also help you compare multiple policies and provide accurate estimates so you can choose a policy that makes sense, even if math isn't your strong suit.

Fixed-Rate Annuities Interest Rates

If you’re concerned about the risk that comes with a variable annuity's rate of return, you may want to consider a fixed-rate annuity with a locked-in interest rate. Today, the guaranteed rate of return averages between 5.2%-6% annually, depending on the guaranteed period you select. As of this year, the following companies offer fixed-rate annuities with top-performing rates:

The Best Fixed Annuities of 2025 by Term Length

Company	Term Length	Interest Rate
AmFirst	2 Years	5.20%
Revol One	3 Years	5.85%
Americo	4 Years	5.30%
Revol One	5 Years	6.05%
American National	6 Years	5.57%
Revol One	7 Years	6.00%
EquiTrust	8 Years	5.35%
Clear Spring	9 Years	5.30%
Revol One	10 Years	5.90%

How to Find Your Annuity Interest Rate

Insurance companies that offer annuities usually make it easy to find an annuity interest rate through instant online quotes and calculators. You can even sometimes compare multiple policies by plugging in information related to you and your desired annuity, such as:

Amount invested
Current age
Withdrawal age
Annual contribution
Expected rate of return
Term of the annuity contract

However, there’s more to the performance of the annuity that determines how much a policyholder will actually receive. Some factors that can reduce payouts include:

Surrender charges
Administration fees
Surcharges
Commissions
Taxes

As you can see, there are many aspects to consider when finding the right interest rate of an annuity. An independent insurance agent can assist you with finding the best annuities and interest rates.

Here's How an Independent Insurance Agent Can Help

Insurance and annuities are complex, and searching through options can be confusing, time-consuming, and frustrating. An independent insurance agent's role is to simplify the process. They'll ensure that you get the right coverage at the best possible rate since your agent has access to multiple companies in your area. And down the road, your agent will still be there to assist you by answering questions, filing claims, and updating your coverage as necessary.

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