Annuity Payout Calculator — Free Online Tool

How to Use the Annuity Payout Calculator

This calculator determines the periodic payment you can receive from a lump sum of money distributed over a fixed number of years, while the remaining balance continues to earn interest. It is the inverse of an accumulation annuity: instead of building up a sum through payments, you are drawing down a sum through distributions.

1. Enter the lump sum amount. This is the total principal that will be converted into periodic payments. It could be your retirement savings, a pension buyout, an inheritance, a life insurance payout, or any other large sum you want to systematically distribute over time. The larger the lump sum, the larger each payment will be.
2. Set the annual interest rate. Enter the rate of return the remaining balance will earn during the payout period. For a fixed annuity from an insurance company, use the guaranteed rate (typically 3-6%). For a self-managed portfolio, use a conservative estimate (4-6% for balanced portfolios). Higher rates produce larger payments because the remaining balance earns more to supplement withdrawals.
3. Enter the payout period. This is the total number of years over which you want to receive payments. For retirement income, this is typically the number of years you expect to need income (life expectancy minus retirement age). Longer periods produce smaller per-year payments but provide security over more years. A common planning period is 25-30 years for someone retiring at 65.
4. Choose the payout type. Select ordinary annuity if you want payments at the end of each period (receive first payment after one full year). Select annuity due if you want payments at the beginning of each period (receive first payment immediately). Annuity due pays slightly less per payment because you receive funds earlier, leaving less time for interest to accrue.
5. Review the payout schedule. The results show the annual payout, its monthly equivalent, total amount you will receive over the entire payout period, total interest earned during distributions, and the payout-to-principal ratio showing how much interest supplements your withdrawals. The chart visualizes the declining balance, and the table shows each year payment, interest, and remaining balance.

Compare different payout periods to find the right balance between payment size and income duration. A shorter period provides larger payments but less security, while a longer period stretches your income further at the cost of smaller annual amounts.

Annuity Payout Formula

The present value annuity formula is rearranged to solve for the periodic payment. This determines the equal payment that, when combined with interest on the remaining balance, will fully deplete the principal over the specified number of periods.

Where each variable represents:

• PMT = Periodic payment amount
• PV = Present value (lump sum principal)
• r = Interest rate per period (as a decimal)
• n = Total number of periods

Step-by-Step Calculation Example

Calculate the annual payout from a $500,000 lump sum at 5% interest over 25 years (ordinary annuity):

1. Identify values: PV = $500,000, r = 0.05, n = 25
2. Calculate the discount factor: (1 + 0.05)⁻²⁵ = (1.05)⁻²⁵ = 0.2953
3. Calculate denominator: 1 − 0.2953 = 0.7047
4. Calculate payment: $500,000 × 0.05 / 0.7047 = $25,000 / 0.7047 = $35,477
5. Monthly equivalent: $35,477 / 12 = $2,956
6. Total payouts: $35,477 × 25 = $886,925
7. Total interest earned: $886,925 − $500,000 = $386,925
8. Payout-to-principal ratio: $886,925 / $500,000 = 177.4%

You receive $886,925 in total from a $500,000 investment because the remaining balance earns interest throughout the payout period. In the early years, most of each payment comes from interest. In later years, more comes from principal as the balance shrinks. By year 25, the balance reaches zero. The 5% rate effectively increases your total distributions by 77.4%.

Practical Annuity Payout Examples

These scenarios demonstrate how annuity payout calculations apply to real retirement planning and financial decision-making.

Retirement Income: Bridging to Social Security

Karen retires at 60 and wants to delay Social Security until age 70 (for the maximum benefit). She allocates $200,000 from her savings as a 10-year bridge. At 4.5% interest (ordinary annuity): PMT = $200,000 × 0.045 / (1 - 1.045^-10) = $25,237 per year ($2,103/month). This provides stable income from age 60 to 70, at which point her Social Security benefit of $3,800/month (delayed maximum) kicks in. Total received: $252,370, which is $52,370 more than the principal, funded by interest on the declining balance. Delaying Social Security increases her lifetime benefit by approximately $125,000 compared to claiming at 62.

Pension Buyout Analysis

James is offered a choice: a $400,000 lump sum pension buyout or $28,000 per year for life. He is 65 years old and expects to live to 85 (20 years). If he takes the lump sum and self-manages at 5%: his annual payout would be $32,097, which is $4,097 more per year than the pension. Over 20 years, he receives $641,940 total vs $560,000 from the pension. However, if he lives to 90 (25 years), the pension provides $700,000 while the self-managed lump sum runs out at year 20. James uses this analysis to decide: since his family has longevity history (parents lived to 88 and 92), he chooses the lifetime pension for security.

Inheritance Distribution Strategy

The Williams siblings inherit $750,000 and decide to distribute it over 15 years rather than spending it all at once. They invest the lump sum conservatively at 4% and calculate the annual distribution: $750,000 × 0.04 / (1 - 1.04^-15) = $67,358 per year ($5,613/month). Each of three siblings receives approximately $22,453 per year. Over 15 years, they receive a total of $1,010,370, with $260,370 in interest earnings supplementing the original inheritance. This systematic approach prevents the common problem of rapidly depleting a large windfall.

Early Retirement: Living on Savings Until Traditional Retirement

Dr. Chen achieves financial independence at 50 with $1,200,000 in savings. She plans to draw income for 15 years until age 65, when her pension and Social Security begin. At a conservative 5% return: her annual payout is $115,439 ($9,620/month). This comfortably replaces her working income. Over 15 years, she receives $1,731,585 total from the original $1.2 million, with interest providing $531,585 in additional income. At age 65, her pension and Social Security provide $5,500/month combined, covering her needs without touching any remaining investments.

Annuity Payout Tips and Complete Guide

Converting a lump sum into a reliable income stream is one of the most important decisions in retirement planning. Understanding how payout calculations work helps you make informed choices about income levels, time periods, and product selection.

Match Your Payout Period to Your Needs

Choose a payout period that aligns with your income gap. If you have Social Security and a pension starting at 67, but you retire at 62, you need a 5-year bridge. If you need income throughout retirement, use life expectancy plus a safety margin (add 5-10 years beyond average). For a 65-year-old with average health, plan for at least a 25-year payout period (to age 90). Running out of money at age 85 when you live to 95 is a far worse outcome than having money remaining at death, so err on the side of longer payout periods with slightly smaller payments.

Consider Inflation in Your Planning

A fixed $35,000 annual payout loses purchasing power every year. At 3% inflation, it buys only $26,000 worth of today goods in 10 years and $19,000 worth in 20 years. To combat this, consider withdrawing less than the maximum payout initially and increasing withdrawals over time, purchasing an inflation-adjusted annuity (which starts lower but increases annually), or keeping a portion of your lump sum in growth investments to supplement fixed payouts as inflation erodes their value.

Use the Bucket Strategy

Rather than converting your entire savings into a single annuity payout, divide your retirement funds into buckets: a short-term bucket (1-3 years of expenses in cash or money market), a medium-term bucket (4-10 years in bonds and fixed annuities), and a long-term bucket (10+ years in stocks and growth investments). This provides immediate income security while allowing growth investments time to appreciate. Each year, replenish the short-term bucket from the medium-term bucket, and the medium-term from the long-term.

Evaluate Commercial Annuity Products Carefully

Insurance company annuity payout rates depend on current interest rates, your age, gender, and the specific contract features. Compare quotes from at least three highly-rated insurers (A.M. Best rating of A+ or better). A 2-3% difference in payout rates between companies is not uncommon, and on a $500,000 annuity, that can mean $10,000-15,000 more per year. Also compare the insurance company annuity rate to what you could generate through self-managed withdrawals using this calculator. If the self-managed rate is similar, the guarantee of the commercial annuity adds value through longevity risk protection.

Common Mistakes to Avoid

• Annuitizing too much of your portfolio. Once you convert a lump sum into an irrevocable annuity payout, you lose access to that capital. Most financial planners recommend annuitizing no more than 40-50% of your retirement savings, keeping the rest accessible for emergencies, healthcare costs, and legacy planning. Maintaining a liquid reserve of at least $50,000-100,000 outside any annuity provides essential flexibility.
• Ignoring sequence-of-return risk with self-managed payouts. This calculator assumes a constant interest rate, but real investment returns fluctuate. Taking fixed withdrawals from a portfolio that drops 30% in year one can permanently impair your income sustainability. If self-managing withdrawals, consider a variable withdrawal strategy (reducing withdrawals in down years) or ladder fixed-income investments (CDs, bonds) to cover several years of expenses regardless of market conditions.
• Forgetting about taxes when planning income. If your $500,000 is in a traditional IRA, the $35,000 annual payout is fully taxable as ordinary income. Your actual after-tax income might be $28,000-30,000. Use after-tax projections when determining whether your payout covers expenses. Consider the tax character of your lump sum (pre-tax, after-tax, or Roth) when deciding where to draw income from, as this significantly affects the net income you receive.
• Choosing too short a payout period for higher payments. It is tempting to choose a 15-year payout instead of 25 years because the payments are larger. But if you run out of funds at 80 and live to 92, those last 12 years without income are devastating. Always build in a longevity buffer. A 25-year-old woman has a 50% chance of living past 90. Plan for the long tail of the lifespan distribution, not the average.
• Not comparing the lump sum to a pension annuity option. If you are offered a pension buyout, compare the lump sum self-managed payout (using this calculator) to the employer pension amount. Factor in the pension COLA protection, survivor benefits, and the guarantee of lifetime income. Many people take the lump sum because the number looks large, but the pension monthly check often provides better lifetime value, especially with COLA adjustments.