What is an Annuity Payout?
An annuity payout is a stream of regular withdrawals from a lump sum that earns interest. You start with a principal balance, the balance accumulates interest each period, and you draw a fixed amount at fixed intervals until the principal is depleted. This calculator answers two complementary questions: given a payout horizon, how much can you withdraw each period; or given a target periodic withdrawal, how long will the principal last?
Two Calculation Modes
- Periodic Payout (Fixed Length): You decide how many years the payouts should last. The calculator returns the largest periodic amount that drains the principal exactly at the end of that horizon.
- Length (Fixed Payment): You decide how much to withdraw each period. The calculator returns the number of years the principal will support, including any final partial payment.
Pay Frequency
Higher pay frequency — e.g., monthly vs. annually — produces slightly higher total payouts because each withdrawal occurs sooner, leaving less principal to grow. The frequency options on this calculator follow standard financial conventions:
- Annually (1 payment/year), Semiannually (2), Quarterly (4)
- Monthly (12), Semimonthly (24, two payments per month), Biweekly (26, every two weeks)
Periodic Interest Rate
The annual interest rate must be converted to a per-period rate before payouts are calculated. This calculator uses the annual compounding convention (matching standard annuity tables): a 6% annual rate compounded once per year becomes a periodic rate of approximately 0.487% for monthly payments, not 0.5%.
i = (1 + r)1/n − 1
where r is the annual rate (decimal) and n is the number of payments per year.
The Annuity Formula
The present-value-of-annuity formula relates the principal to the periodic payment, periodic rate, and number of periods (N = years × n):
P = PMT × (1 − (1 + i)−N) / i
Solving for PMT (Fixed Length mode) gives the periodic payout. Solving for N (Fixed Payment mode) gives the number of periods, which divided by frequency yields the number of years.
Worked Example
Start with $500,000 at 6% annual interest, paid monthly over 10 years:
- Periodic rate i = (1.06)1/12 − 1 ≈ 0.004868
- Number of periods N = 10 × 12 = 120
- Periodic payout PMT = 500,000 × 0.004868 / (1 − 1.06−10) ≈ $5,511.20
- Total of 120 payments ≈ $661,344
- Total interest earned ≈ $161,344
Annuity vs. Self-Managed Withdrawal
This calculator models a deterministic annuity: a fixed interest rate and a fixed payout schedule. In practice, retirees often manage withdrawals from a portfolio of stocks, bonds, and cash whose returns vary year to year. Such "sequence of returns" risk — suffering a market drop in early withdrawal years — is the single biggest threat to a portfolio's longevity. The 4% rule and Monte Carlo retirement simulators address that variability; the annuity formula here assumes a smooth, guaranteed return.
Tax Considerations
If the principal is held in a tax-deferred account (traditional IRA, 401(k)), each withdrawal is taxable as ordinary income at your marginal rate — the displayed payout is pre-tax. Roth IRA withdrawals (after age 59½ and 5-year seasoning) and after-tax brokerage interest are taxed differently. Commercial annuities sold by insurance companies may also have surrender charges, mortality fees, and tax treatment that this calculator does not model.
Inflation Risk
A constant nominal payout loses purchasing power year by year. At 3% inflation, $5,511 today buys what about $4,094 buys in 10 years — a 26% reduction in real terms. To preserve real income, retirees often combine an annuity with inflation-indexed assets (TIPS, equities) or choose an inflation-adjusted annuity contract whose payment rises annually but starts lower than a fixed-payment annuity of equal cost.