Annuity Payout Calculator, Explained
After reading this, you can compute the level monthly payout a lump sum sustains over a fixed number of years while the balance keeps earning interest, and you can flip the question to find how long a chosen payout lasts.
What this calculator does
You have a pile of money. You want to draw a steady monthly amount from it for a set number of years, and you want the last withdrawal to empty the account exactly on schedule. The money that stays in the account keeps earning interest, which stretches the payments further than simple division would.
Here is the hook. Suppose you have 500,000 earning 5% per year, and you want it to last 25 years. Simple division says 500,000 / (25 × 12) = 1,666.67 per month. But because the balance keeps earning, the real sustainable payout is about 2,922 per month. That is roughly 75% more, and the whole difference is interest earned on money you have not yet withdrawn.
This is the math of a fixed-term immediate annuity, computed without any insurer in between. It answers two symmetric questions: given a period, what payout is level and sustainable, and given a payout, how many months does the money last.
When to use it, and when not
Use it when you have a known lump sum, you want a flat monthly draw, and you assume a steady return. It fits pension lump-sum comparisons, a retirement bucket meant to run down over a fixed horizon, or a structured payout to a family member.
Do not use it when your withdrawals rise with inflation, because this model keeps every payment identical. A payout of 2,922 buys less each year as prices climb. Do not use it when your return varies year to year in a way that matters to you, because the math assumes one constant rate. And it is not a commercial annuity quote.
A real insurer will pay you less than this calculator shows. The gap covers their costs, their profit, and the longevity risk they take on lifetime products. Treat the number here as the theoretical ceiling, not the offer you will receive.
If you want inflating withdrawals instead of level ones, use the How Long Will My Money Last? tool. If you are still building the lump sum, the Retirement Savings Calculator estimates the balance you arrive with.
The formula and why it works
The lump sum is the present value of every future payment discounted back at the monthly rate. That gives the standard annuity present-value equation:
Here PV is the lump sum, PMT is the monthly payout, i is the monthly interest rate, and n is the number of monthly payments. The monthly rate is the annual rate divided by 12, so 5% per year gives i = 0.05 / 12 \approx 0.004167. The period in months is n = 12 \times \text{years}.
The fraction is the present value of receiving 1 unit every month for n months. Each payment is worth less the further out it sits, because a dollar today could have grown at rate i. Sum those shrinking values and you get that bracketed factor. To find the payout, rearrange:
To find the duration instead, solve for n. This only has a solution when the payout exceeds the monthly interest earned on the full balance, otherwise the money never runs out:
When the annual rate is 0%, the interest term collapses and the payout is just PV / n. The calculator handles this case separately, since dividing by i = 0 in the main formula would fail.
A worked example with the demo numbers
500,000 at 5% for 25 years
These are the tool's default values. Follow the steps and you will reproduce the payout it reports.
- Monthly rate: i = 0.05 / 12 = 0.0041\overline{6}.
- Number of payments: n = 25 \times 12 = 300.
- Discount factor: (1 + i)^{-n} = 1.0041667^{-300} \approx 0.28725.
- Annuity factor: \frac{1 - 0.28725}{0.0041667} \approx 171.06.
- Payout: PMT = 500{,}000 / 171.06 \approx 2{,}922.62.
So the lump sum sustains about 2,922.62 per month for 300 months. Over the full term you receive 2,922.62 × 300 ≈ 876,786. Of that, 500,000 is your original money and roughly 376,786 is interest earned along the way.
The chart below shows the balance falling to zero across those 25 years. Notice that it drops slowly at first, because early interest almost keeps pace with the withdrawals, then falls faster as the shrinking balance earns less.
How the rate reshapes the payout
The interest rate is the lever that matters most. At 0% the 25-year payout is just 500,000 / 300 = 1,666.67. At 5% it is 2,922.62. At 8% it climbs to about 3,859. Every extra point of return lets the surviving balance work harder, so the payout rises faster than linearly.
Reading and interpreting the result
In payout mode the number is the largest flat monthly draw that empties the account exactly at the end of the term. Draw more and you run out early; draw less and you leave money behind.
In duration mode the answer is a number of months, which the tool usually shows as years and months. Watch for one boundary: if your chosen payout is at or below the monthly interest on the full balance, the money lasts forever in this model and no finite duration exists. At 5% on 500,000, monthly interest is 500,000 × 0.0041667 ≈ 2,083. Any payout at or under that never depletes the principal.
| Annual rate | Monthly payout | Total received | Interest share |
|---|---|---|---|
| 0% | 1,667 | 500,000 | 0 |
| 3% | 2,371 | 711,300 | 211,300 |
| 5% | 2,923 | 876,900 | 376,900 |
| 8% | 3,859 | 1,158,000 | 658,000 |
Common mistakes
The errors below change the answer by large amounts, so it is worth checking each one.
- Confusing the annual and monthly rate. The formula needs i = \text{annual} / 12. Plugging the annual rate straight in overstates the payout badly.
- Ignoring inflation. A flat
2,922for 25 years loses purchasing power every year. At 3% inflation, its real value after 25 years is about2,922 / 1.03^{25} \approx 1,395. - Treating the rate as guaranteed. The math assumes one fixed return. Real markets vary, and a run of poor early years can empty the account before the term ends even if the average return matches your assumption.
- Forgetting tax. Depending on the account, part of each payout may be taxable, which reduces what you actually keep.
Related tools
To value an existing stream of payments rather than derive one, use the Annuity Value Calculator. To plan the wider picture of financial independence, see the FIRE Calculator and the Coast FIRE Calculator.
Frequently asked questions
Why is the payout so much higher than dividing the lump sum by the months?
Because the money you have not withdrawn keeps earning. Simple division ignores that interest. At 5% over 25 years the interest contributes about 376,900 of extra payout capacity on a 500,000 balance.
What rate should I enter?
Use a return you can reasonably expect on the account for its whole life, after fees. A conservative fixed-income portfolio might justify 3% to 5%. A higher figure raises the payout but also the risk that reality falls short.
Why does duration mode sometimes say the money never runs out?
When your payout is at or below the monthly interest on the full balance, you never touch the principal. At 5% on 500,000, that threshold is about 2,083 per month.
Does this account for inflation?
No. Every payment is the same nominal amount. For withdrawals that rise with prices, use the money duration tool instead.
Why would a real annuity pay less?
An insurer prices in expenses, profit, and longevity risk on lifetime products. This calculator is a pure math estimate for education, not an insurance quote or financial advice. Talk to a qualified adviser before acting.
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