Annuity Payout Calculator

Annuity payment refers to the point at which the original capital invested is paid out. You already have an amount that generates a continuous income and you pay it out gradually through regular payments. This calculator answers two common questions in this phase: how much can be withdrawn per period if the capital is to last for a given number of years? And, how long will the capital last if the payment amount remains constant? If one of these fields is left blank, then either the initial capital invested or the interest rate can also be calculated.

Fixed term or fixed payout amount

There are two ways to plan for annuity payments and this calculator covers both with the same input fields. In a fixed term payment you set the number of years and it calculates what each individual payment needs to be until the balance is zero. This is a common question from retirees who want to fix their income at 10 or 20 years, for example.

The Fixed Payment Mode works the other way around. It determines how much to pay out per period and calculates for how long the balance will support that payment. To activate this mode, leave the Years field blank and enter your desired payment amount. To activate the previous mode (Fixed Term), leave the Payment Amount field blank and enter the number of years. You do not need to switch modes; just enter what you know.

Here's how to use this calculator:

First enter the initial capital, expected annual return and desired frequency of withdrawals. Then either enter the number of years or the withdrawal amount and leave the other field blank. The calculated withdrawal amount or length of time that the capital will last is shown above. Also shown are the total amounts withdrawn and what proportion of this is interest.

If the Cost of Living option is selected, then each payment amount can be increased by a certain percentage every year, similar to how many pensions adjust for inflation. If the Yield Rate Sensitivity option is selected, you can review the payment amounts using yield rates slightly below or above your estimated rate. This is useful because the yield rate is an input parameter that you cannot control.

Calculation of payouts:

The calculation for fixed payment periods is based on a formula to determine the present value of an annuity which is then solved for the payment amount. The capital must be equal to the present value of all payments made.

P is the principal amount, i is the rate of interest per period and n is the total number of payments. If the payment is made at the beginning of a period rather than the end, divide the result by a number one greater than the interest rate for that period. The periodic interest rate is an effective interest rate derived from the annual value using compound interest calculations. So if payments are made m times per year, i equals (1 + annual interest rate) to the power of (1/m) minus one and n is the product of the number of years and m. This ensures that the annual interest rate remains constant regardless of how often the payment is made (monthly or annually).

Suppose you have $500,000 in capital at retirement, a rate of return of 6 percent and want monthly payments for 10 years. The periodic interest rate is 1.06 to the one twelfth power minus one, which is about .4868 percent per month, and the number of payments is 120.

Thus, with the capital you have, you can withdraw about $5,511 per month. The total amount after 120 withdrawals is approximately $661,344, of which $161,344 is interest earned on the principal during the withdrawal period, plus the initial $500,000. In this example table, you can see each symbol and its corresponding value.

How long can capital be sustained?

In the Fixed Payment mode, the calculator uses the same formula to determine the period. There are certain edge cases that need to be considered. If the amount withdrawn in each period is below the interest earned on the capital, then the rate of increase in the balance will be higher than the rate at which withdrawals are made so the capital will never run out. The calculator shows the amount that can only be paid by interest and allows you to determine the withdrawal amount that can be sustained indefinitely.

In the example with $500,000 and a 6 percent interest rate, that would generate about $2,434 in interest for the first month. If less is withdrawn than that amount, then the principal grows further. If more is withdrawn, the interest earned on the remaining balance will be reduced, which means the account will decrease faster each period until it eventually reaches zero.

Realistic payout options

This calculator simulates two payout options that are based on clear numerical conditions: a fixed term (also called "period certain") and a fixed payment amount. Insurance companies also offer other options that aren't based on arithmetic results but rather average life expectancy, so it's good to know about them even though they can't be calculated here.

One-time payout

Instead of receiving the entire amount distributed, it is paid out all at once. While this is a simple method, it can cause you to fall into a higher tax bracket as multiple years' worth of income are concentrated into one year.

Lifetime Pension:

The insurance company will pay as long as you live and the amount is based on your life expectancy. The payments stop when you die but if you die earlier then the payment stops accordingly.

Joint life and survivor's pension:

The payouts will continue for as long as either you or usually your spouse is alive. As two lives are being covered the amount per payout is lower than with a pure lifetime annuity.

Lifetime pension with guaranteed duration:

This is a combination of the two previous methods. The income is guaranteed for the entire term. If the beneficiary dies within the chosen period, say ten years, they will still receive payments until the end of that period.

Factors that affect payout amounts:

There are three factors that affect this value. The interest rate is the most important factor. The higher the interest rate, the more money can be spent while still building up the balance to allow for larger payouts or longer terms. The frequency of payouts also plays a role. More frequent payouts mean less money left as an investment between each payout. Timing also has a slight effect. If payments are made at the end of the term rather than the beginning, then slightly less capital is needed for each individual payout. The pie charts below, the balance usage graphs and the annual plans show how the balance reduces to zero over the entire term.

Tax aspects of pensions:

The way in which withdrawals are taxed depends on the source of the retirement money. Qualified retirement accounts are generally those held within retirement plans such as an IRA or 401(k), where capital is typically contributed pre-tax, so that distributions are taxed as regular income. In non-qualified retirement accounts, capital is invested after taxes have been paid, so only the earnings portion of each distribution will be taxable. If money is withdrawn before age 59½, a 10 percent penalty may apply. This calculator uses pre-tax values, so results should be considered to be total distributions before tax.

This calculator is for educational and planning purposes only and does not constitute financial advice. Interest rates, fees, and tax considerations can vary, and the performance of insurance products also depends on your age, contract terms, and current interest rates. Please consult a qualified professional before making decisions about how you want to withdraw your funds or take out an annuity.