Annuity Payout Calculator

• Works out the level (or yearly-rising) monthly payment that uses up a lump sum exactly over the payout period you choose, or the reverse.
• Compares payout rates for 5 to 30 years so you can see how the period drives the payment.
• Lets you type in a payout rate for life from an insurer quote, then shows break-even years and the return you would need to match it.
• Models a fixed-period annuity only. It does not price a lifetime annuity, which depends on age, sex and the insurer.

How to use this calculator

Choose whether you want to find the monthly income a lump sum would buy or the lump sum needed for a target income. Enter the lump sum, the target monthly income, the payout period in years, and the annual interest rate the annuity earns. Both amounts are always shown, but the one you choose is the headline.

Open Advanced to add a yearly increase (COLA), to switch payments to the start of each month, to enter the age you start and the age you plan to, and to type in a payout rate for life taken from a real quote. That last box is what turns the page from a fixed-period calculator into a comparison with a lifetime product.

What this calculator models, and what it does not

An immediate annuity swaps a lump sum for a stream of payments. Two quite different products sit under that name. A fixed-period (period-certain) annuity pays for a set number of years and then stops. A life annuity pays for as long as you live, and the insurer prices it using mortality tables, so the payment depends on your age, sex, the insurer's investment returns and any guarantee period, such as 10 years certain.

This calculator does the maths for the first kind. It treats the lump sum as earning a fixed interest rate and pays it out evenly over the period. It cannot work out a lifetime payment, because the main ingredient, how long you will live, is unknown. If you have a written quote for a lifetime payment, enter its payout rate (a year of income divided by the premium) under Advanced and the calculator will compare it with the fixed-period figures and with investing the money yourself.

How the payment is calculated

i = annual rate / 12          n = years x 12
Level payment = lump sum x i / (1 - (1 + i)^-n)
With a COLA: payment in month t = P x (1 + COLA)^(whole years elapsed)
             P = lump sum / sum of [growth factor x (1 + i)^-t]
Lump sum for a target = target monthly income x the same sum
Payout rate = first-year payments / lump sum

This is the same formula used for a loan, run in reverse: the insurer holds your money like a lender's balance, adds interest each month and pays it down to zero on the last payment. The year-by-year table shows how much of each year's payments is interest and how much is your own money coming back.

A worked example

Suppose you have $300,000 and want it paid out over 20 years at 5.0%, with level payments at the end of each month. The monthly payment is about $1,980, which is 7.92% of the lump sum in the first year. Over 20 years that adds up to $475,168, so $175,168 of it is interest the money earned along the way.

Turn it around: to receive $2,000 a month for the same 20 years, the lump sum needed is about $303,051.

Now ask for payments that rise 2.0% a year. The first payment falls to about $1,684, and the last one, in year 20, is about $2,453. You start lower and finish higher, and it takes years for the extra payments to catch up with the level stream.

Why a payout rate can mislead

A payout rate is the first year of payments divided by the lump sum. It looks like an interest rate, but it is not one. For this example the 20-year payout rate is 7.92%, while the interest rate is only 5.0%. The difference is your own principal being returned.

The payout period moves the number a great deal. On the same $300,000, a 10-year payout is 12.7% a year, a 20-year payout is 7.9% and a 30-year payout is 6.4%. A quoted payout rate means little until you know how long the payments last. A lifetime quote that looks like a high number is partly your own money returning, too.

Comparing a lifetime quote with investing it yourself

Enter a payout rate for life from a real quote to see how it compares. As an illustration only, suppose a quote pays 7.0% of the premium each year for life. On $300,000 that is $21,000 a year. Three numbers help judge it.

• Simple break-even. Payments add up to the premium after 14.3 years. Live longer than that and you are ahead of just getting your money back.
• Break-even allowing for interest. If your money would have earned 4.0% elsewhere, payments catch up with it after 21.2 years.
• The return you would need. To pay the same income yourself until age 95, a portfolio would have to earn about 5.75% a year.

None of this says whether to buy. A lifetime annuity transfers the risk of outliving your money to an insurer; investing it yourself keeps flexibility and anything left over for heirs. The quote of 7.0% above is a made-up input, not a current market rate. Always get real, written quotes.

Types of annuity, and which one this is

The word annuity covers several products. A single premium immediate annuity (SPIA) starts paying within about a year of a lump-sum purchase, either for life or for a set period. A deferred annuity accumulates money first and pays later, and a fixed indexed or variable annuity ties the growth to a market index or to investment funds, often with fees and caps. This calculator is closest to an immediate, period-certain annuity, where the amount, the period and the rate are known up front. It is not a model of a deferred or indexed product, whose payments depend on contract terms the calculator cannot see.

Some contracts blend the two ideas, for example a life annuity with a 10-year certain period, which pays for life but guarantees at least 10 years of payments to you or a beneficiary. The guarantee costs something, so the payment is lower than a plain life annuity at the same age.

How to read a real quote

Before you compare a quote with the numbers here, write down what it actually promises. Check these items:

• Premium and payment. Divide a year of payments by the premium to get the payout rate you can enter under Advanced.
• Life or period. Is it for one life, two lives (joint) or a fixed term? Joint-life payments are lower.
• Guarantee period. What happens to the remaining payments if you die early?
• Inflation protection. Is the payment level, or does it rise each year? The COLA input here applies only to the fixed-period figures.
• Fees and commissions. Immediate annuities usually build costs into the price, so compare several insurers.
• Insurer strength. Look up the company's financial-strength ratings and your state's guaranty association limit.

Quotes are valid for a short time because they move with interest rates. A written quote from three or more insurers is a fair minimum before you decide.

When an annuity can make sense, and when it may not

People look at immediate annuities for one main reason: to turn savings into income they cannot outlive, which is protection against longevity risk. It tends to appeal to someone who wants to cover essential bills with guaranteed income and keep the rest invested. It tends to suit a person with little guaranteed income beyond Social Security who worries about running out of money.

It is less attractive when you need the money to stay available for emergencies, when you expect a short lifespan, when you want to leave the money to heirs, or when rates are low and payments are small. The comparison on this page shows the break-even age and the return needed, but the choice also depends on health, family history, other income and how you feel about risk. A fee-only adviser who does not earn commissions on annuities can help you think it through.

Assumptions and limitations

• Fixed period, not for life. Payments stop at the end of the period. Real lifetime quotes depend on age, sex, health class, the insurer and guarantees, and differ from company to company.
• Constant interest rate. The rate you enter is assumed to apply for the whole period, compounded monthly.
• Level or fixed-percentage increases. A COLA of 0% to 3% is applied once a year. Quotes for increasing life annuities are priced differently.
• The lifetime quote is level. The COLA setting applies only to the fixed-period figures.
• No taxes, fees or surrender charges. Payments from pre-tax retirement money are generally taxed as ordinary income. Annuities bought with after-tax money are taxed partly as a return of your cost under the IRS general rule.
• Insurer risk. Guarantees are only as good as the insurer. State guaranty associations back annuities up to a limit, commonly $250,000 in present value, which varies by state.

Common mistakes

Comparing payout rates for different periods. A 10-year payout rate and a lifetime payout rate are not the same kind of number.

Treating the payout rate as a return. It includes your own principal.

Ignoring inflation. Level payments lose buying power. At 2.5% inflation, the last payment in this example is worth about $1,208 in today's money.

Putting everything into one product. Many people annuitise only the amount needed to cover essential spending and keep the rest invested.

Skipping the fine print. Check the guarantee period, what happens to payments if you die early, fees, and the insurer's financial-strength ratings before you sign.

Frequently asked questions