Annuity Payout Calculator
Got a lump sum and need regular income? This calculator shows how much you can withdraw each period while earning interest on the remaining balance.
The Math of Systematic Withdrawals
Annuity payout calculations solve for the payment amount that perfectly exhausts principal and interest over a set period. It's essentially an amortization schedule in reverse—instead of paying down a loan, you're withdrawing from savings.
Start with $500,000 earning 5% annually. If you withdraw nothing, it grows to $1.28 million in 20 years. If you withdraw too much, it depletes early and you run out of money. The perfect withdrawal is $3,299 monthly, which over 20 years totals $791,760—your original $500,000 plus $291,760 in interest earned along the way.
The key insight: early withdrawals pull mostly from interest, with principal intact. By year 10, you've received $395,880 but still have $318,000 remaining. The final years draw heavily on principal as the balance shrinks and interest income drops. The last payment empties the account completely.
Comparing Annuity Strategies
You can structure annuity payouts many ways. A 20-year period certain means payments stop after 20 years even if you're still alive. Life annuity means payments continue until death, even if you live to 110, but they stop the moment you die—nothing for heirs.
Period certain with cash refund returns any remaining principal to your beneficiaries if you die early. Joint and survivor continues payments to your spouse after you die. Each variation changes the payment amount because the insurance company adjusts for the expected payout duration.
The worst deal is usually single-life annuity with no refund. You hand over $500,000, receive payments until death, and if you die after one year the insurance company keeps $480,000. Great for them, terrible for you unless you're in perfect health and expect to live to 100. Statistically, the insurance company wins these bets.
DIY Annuities vs Insurance Products
You can create your own annuity by investing a lump sum and making systematic withdrawals. Keep $500,000 in a 60/40 stock/bond portfolio, withdraw $2,500 monthly, and rebalance annually. If markets cooperate, you might preserve principal or even grow it. If markets tank early, you risk depleting the account prematurely. That's sequence of returns risk.
Insurance annuities eliminate sequence risk by pooling it across thousands of buyers. The company invests your lump sum, and they guarantee payments regardless of market conditions. The cost is steep: maybe $2,000 monthly guaranteed versus $2,500 you could withdraw yourself. That $500 monthly gap is your insurance premium.
For most people, a DIY approach with conservative withdrawal rates (3-4%) beats buying an annuity. You keep control, preserve flexibility, and leave a legacy. Buy an annuity only if longevity runs in your family and you're confident you'll outlive actuarial tables, or if you have zero discipline and need forced structure to avoid spending everything in 5 years.
Frequently Asked Questions
How does an annuity payout work?
You start with a lump sum that earns interest. Each payment draws down the balance, but the remaining amount keeps earning returns. The payment is calculated so the balance reaches exactly zero at the end of the payout period.
What return rate should I use?
For conservative planning, use 4-5%. Aggressive portfolios might use 6-8%. The rate should reflect what your remaining balance can realistically earn after accounting for fees and taxes.
Is this the same as the 4% rule?
Similar concept but different calculation. The 4% rule withdraws 4% of the initial balance, adjusted for inflation, and never touches principal. This calculator depletes the entire balance over the specified period.
What if I live longer than the payout period?
Then you run out of money. That's the risk with fixed-period annuities. Lifetime annuities from insurers solve this by pooling longevity risk, but they cost more because the insurer needs to cover those who live to 100+.
Can I adjust payments each year?
This calculator assumes level payments. For inflation-adjusted payments, you'd need a more complex calculation or use a specialized retirement planning tool.