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Annuity Calculator

Determine the periodic payments you can receive from a lump sum investment, or figure out how much you need to invest to achieve your desired payment stream. Useful for retirement income planning.

An annuity is a financial product that converts a lump sum of money into a stream of periodic payments over a specified time horizon. The original lump sum earns interest, and each periodic payment draws down both interest and principal. The structure makes annuities useful for any situation where someone wants a predictable income stream from a fixed pool of money — retirement income, structured settlements, lottery payouts, pension distributions, or simply "I have $500K and want it to last 25 years."

This calculator uses the standard annuity payout formula to compute what periodic payment a given lump sum supports at a given rate over a given term. It also works in reverse: enter a desired payment and the calculator tells you the lump sum needed to support it. The math here is the same as the math behind insurance company immediate annuities — the difference between this calculator and an actual annuity product is that the insurance company adds a profit margin and (for lifetime annuities) mortality assumptions.

A key distinction: this calculator models a fixed-term annuity (payments for a set number of years). Real-world annuities also come in lifetime versions (payments for as long as you live) and joint-life versions (payments until both spouses die). Lifetime annuities use actuarial mortality tables and pay more per period than equivalent fixed-term annuities, but the math is more complex and outside the scope of this simpler tool. Use this calculator for planning estimates; consult a qualified advisor for actual annuity purchase decisions.

Inputs

$
%

Results

Monthly Payment

$3,300

Total Payments

$791,947

Total Interest Earned

$291,947

Remaining Balance Over Time

Principal vs Interest in Payments

Yearly Payout Summary

YearPaymentsPrincipalInterestEnd Balance
1$39,597.34$14,936.56$24,660.79$485,063.44
2$39,597.34$15,700.74$23,896.60$469,362.70
3$39,597.34$16,504.02$23,093.33$452,858.68
4$39,597.34$17,348.40$22,248.95$435,510.29
5$39,597.34$18,235.97$21,361.37$417,274.32
6$39,597.34$19,168.96$20,428.38$398,105.36
7$39,597.34$20,149.68$19,447.66$377,955.68
8$39,597.34$21,180.58$18,416.77$356,775.10
9$39,597.34$22,264.21$17,333.13$334,510.89
10$39,597.34$23,403.29$16,194.05$311,107.59
11$39,597.34$24,600.65$14,996.69$286,506.94
12$39,597.34$25,859.27$13,738.08$260,647.67
Last updated: Reviewed by the CalcMountain editorial team

Formula

Periodic payment from a lump sum (ordinary annuity, end-of-period payments): PMT = P × [ r × (1 + r)^n ] / [ (1 + r)^n − 1 ] Where: P = Principal (lump sum) r = Periodic interest rate (Annual rate ÷ payments per year) n = Total number of payments (years × payments per year) For monthly payments: r = Annual / 12, n = Years × 12 For quarterly: r = Annual / 4, n = Years × 4 For annual: r = Annual / 1, n = Years × 1 Reverse calculation — principal needed for desired payment: P = PMT × [ (1 + r)^n − 1 ] / [ r × (1 + r)^n ] Total payments received: Total = PMT × n Of which: Principal returned = P Interest earned = Total − P Example: $500,000 principal, 5% annual rate, 20-year payout, monthly payments. r = 0.05 / 12 = 0.004167 n = 20 × 12 = 240 PMT = 500,000 × [0.004167 × (1.004167)^240] / [(1.004167)^240 − 1] PMT ≈ $3,300/month Total payments over 20 years: $3,300 × 240 = $792,000 Total interest earned: $792,000 − $500,000 = $292,000 Reverse — to receive $5,000/month for 20 years at 5%: P = 5,000 × [(1.004167)^240 − 1] / [0.004167 × (1.004167)^240] P ≈ $757,575 You'd need roughly $757,575 principal to support a $5,000/month income for 20 years at a 5% return rate.

How to use this calculator

  1. Enter your principal — the lump sum you have available to convert into a payment stream. Could be retirement savings, an inheritance, a lottery lump-sum option, or a structured-settlement principal.
  2. Enter the expected annual interest rate. For fixed annuities currently being sold by insurance companies, 4–6% is typical. For self-managed conservative portfolios, similar range. Higher rates require more market risk.
  3. Set the payout period in years. The longer the period, the smaller each periodic payment.
  4. Choose payment frequency: monthly is most common for retirement income, quarterly for some structured payouts, annual for simple long-horizon planning.
  5. Review the periodic payment amount, total payments over the life of the annuity, and the implied interest earned.
  6. For a reverse calculation (what principal supports a desired payment), run the calculator iteratively — try different principal amounts until the output payment matches your target.
  7. Compare the calculator output to actual annuity quotes from insurance companies. Real annuities pay less than the calculator suggests because (a) insurer profit margin and (b) for lifetime annuities, the actuarial premium for longevity insurance.

Worked examples

Retirement income from a 401(k)

$600,000 401(k) balance at retirement, want monthly income for 25 years, expecting 5% return. PMT = 600,000 × [0.004167 × (1.004167)^300] / [(1.004167)^300 − 1] ≈ $3,508/month Annual income: $42,096 Total payments: $1,052,400 Interest earned over 25 years: $452,400 The "longer your money lasts" rate (5%) and the time horizon (25 years) together determine the income. At 3% return, the same $600K supports only ~$2,844/month for 25 years.

Lottery lump sum vs annuity

Lottery jackpot: $100M paid as 30-year annuity (~$3.33M/year). Lump sum option: $60M. Solving for the implied rate of the annuity stream: $60M lump sum that supports $3.33M/year for 30 years requires a rate of about 4.0%. If you can earn 5%+ on the lump sum after taxes, taking the lump sum and managing it yourself produces more value than the annuity. If you can only earn 3%, the annuity produces more. Caveat: lottery winners often face crisis-level disruption to their financial lives. Annuities provide forced discipline; lump sums require excellent financial control.

Inheritance — how long will it last?

Inherit $300,000. Want $2,000/month income from it. At what rate would it last 20 years? Solving for r in: 2,000 = 300,000 × [r × (1+r)^240] / [(1+r)^240 − 1] Required rate: approximately 6.0% annualized. If you can only earn 4% safely, the same $2,000/month income lasts about 17 years before depletion. Either reduce monthly draw or accept more market risk for the higher rate.

When to use this calculator

Use this calculator when planning any income-from-principal scenario: structured retirement withdrawals from a brokerage account, planning what an inheritance can sustain, comparing lottery annuity vs lump-sum options, evaluating structured settlement offers, or sizing a 529 college fund's drawdown during the college years.

It's a basic planning tool, not an investment recommendation. Real-world implementations face complications the calculator doesn't model: market volatility (sequence-of-returns risk in early years), inflation eroding the real value of fixed payments, taxes (annuity payments include both return of principal — non-taxable — and interest — taxable), and longevity uncertainty (will you outlive the planned term?).

For retirement income specifically, pair this calculator with the retirement-savings calculator (broader projection), the social-security calculator (since SS provides inflation-adjusted lifetime income that pairs well with annuity-style withdrawals from a portfolio), and the FIRE calculator (which uses a similar mathematical framework — 4% withdrawal rate is essentially an annuity calculation in reverse).

Insurance company annuities (immediate annuities, deferred annuities) use this same math as a starting point but layer on additional features: lifetime guarantees, joint-life options, inflation riders, death benefits, and surrender charges. Costs can be substantial — insurance company annuities typically pay back the equivalent of a 5–6% return on equivalent self-managed portfolios after fees, vs. perhaps 7%+ on a typical equity portfolio. The trade-off is the longevity insurance (income for life) and guaranteed nature, both of which have real value for some retirees but cost real money.

Self-managed annuity-style withdrawal (the "systematic withdrawal" approach) from a balanced portfolio is the most common alternative — same income concept, you keep the underlying assets and any unused balance at death, but you take on the market risk yourself.

Common mistakes to avoid

  • Confusing this calculator with insurance company annuity products. The calculator computes the math; real annuities cost more (insurer profit) and offer additional features (lifetime guarantees, inflation adjustments) at additional cost.
  • Ignoring inflation. A $3,300/month annuity payment is great today but $2,200/month of real purchasing power 20 years from now at 3% inflation. Fixed annuity payments lose ground to inflation unless explicitly indexed.
  • Picking a payout period too short. Planning a 15-year payout when you might live 30 more years runs the well dry. For retirement income, plan for the longer-than-expected lifespan, not the average.
  • Forgetting taxes. Annuity payments from a Traditional IRA are taxed as ordinary income. From a Roth, tax-free. From an insurance company immediate annuity, partially taxable (the interest portion) and partially return of principal. Tax treatment varies materially.
  • Treating insurance annuity quotes as comparable to this calculator. Insurance companies build profit margin into the math and use mortality assumptions for lifetime versions. Their quoted payments are usually 5–15% lower than equivalent self-managed math for the same principal and rate.
  • Not considering systematic-withdrawal alternatives. The "4% rule" (or similar) from a balanced portfolio is a more flexible alternative to insurance company annuities, with the trade-off of taking on market risk yourself. Compare the two before committing to either.

Frequently Asked Questions

Sources & further reading

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