Annuity Payout Calculator

Q: Are annuity payouts taxable?

Yes, at least partly. Payments from an annuity bought inside a 401(k) or traditional IRA are fully taxable as ordinary income. For an annuity bought with after-tax money, each payment is split into a tax-free return of your principal and a taxable earnings portion, using an exclusion ratio the insurer reports on Form 1099-R.

Q: What happens to an annuity when the owner dies?

It depends on the payout option chosen. A period-certain payout continues to a named beneficiary for the remaining years. A life-only annuity stops at death with nothing to heirs, which is why it pays the most. Joint-and-survivor and life-with-period-certain options continue payments to a spouse or guarantee a minimum number of years in exchange for a lower monthly amount.

See how much monthly income a lump sum can pay for a set number of years, how long a balance lasts at a given withdrawal, or the nest egg you need for a target income.

Turn a Lump Sum Into Reliable Income

What an Annuity Payout Actually Is

An annuity payout converts a pile of money into a stream of regular payments. The pile can be an insurance contract you bought, a 401(k) or IRA balance you draw down yourself, a lottery prize, or a legal settlement. The math is the same in every case: a starting balance, a rate of return earned on what is left, and a schedule of payments that gradually empties the account.

Period-certain vs. lifetime: A period-certain payout runs for a fixed number of years, say 20, and then stops. A lifetime annuity keeps paying for as long as you live, funded by an insurer that pools thousands of annuitants. This calculator models the period-certain case, which is also exactly how a self-managed drawdown works.

Immediate vs. deferred: An immediate annuity starts paying within a year of purchase. A deferred annuity grows for years first and starts paying later, typically at retirement. Enter the balance you will have on the day payments begin, not today's balance.

Fixed vs. variable: A fixed payout is a set dollar amount. A variable payout rises and falls with the investments inside the contract. The optional annual increase input models a fixed annuity with a cost-of-living rider, which starts lower and grows each year.

Key Insight: The number an insurer quotes for a lifetime annuity is not a rate of return you can compare to a bond. Part of every payment is your own principal coming back to you. A 65-year-old receiving 7% of the purchase price each year is getting roughly 3-4% investment return plus a return of capital.

How the Payout Formula Works

The payment that exactly exhausts a balance over a set term is the same formula banks use for a loan payment, run in reverse. You are the bank; the annuity is lending your money back to you.

Payment = Balance × r ÷ (1 − (1 + r)⁻ⁿ), where r is the return per period and n is the number of periods.

Worked example: $500,000 earning 5% a year, paid monthly for 20 years. The monthly rate is 0.4167% and there are 240 payments. The formula gives $3,300 a month. Over the full term you receive $791,947, of which $291,947 is interest earned on the shrinking balance and $500,000 is your original money.

Notice that the balance keeps earning for the whole term. In year one the account earns about $24,700 of interest while paying out $39,600, so it shrinks only about $14,900. By year 20 almost every payment is principal. The year-by-year table in the calculator shows this crossover.

Pro Strategy: Small rate differences matter enormously over long payouts. The same $500,000 over 20 years pays $3,030 a month at 4% but $3,580 at 6%, a difference of $132,000 over the term. Shop the assumed rate as hard as you shop the payment.

Annuitizing vs. the 4% Rule

The 4% rule says withdraw 4% of your balance in year one, raise it with inflation each year, and a diversified portfolio will very likely last 30 years or more. On $500,000 that is $20,000 a year, about $1,670 a month, with the principal still invested and available to heirs or for emergencies.

Annuitizing the same $500,000 over 20 years at 5% pays $3,300 a month, almost double. The catch is that at the end of the term the money is gone, and inflation has quietly cut the purchasing power of a level payment by roughly 45% over 20 years at 3% inflation.

Choose a higher payout when you need to cover fixed expenses that Social Security and pensions do not, and leaving an inheritance is not a priority.
Choose the 4% rule when you want flexibility, expect to live a long time, or want the balance to pass to heirs.
Do both by annuitizing only the amount needed to close the gap between guaranteed income and essential expenses, then investing the rest.

Reality Check: Turn on a 2% annual increase in the calculator and the starting payment on $500,000 falls from $3,300 to about $2,810. That is the price of protecting against inflation, and it is usually worth paying for a payout that has to last decades.

When an Annuity Makes Sense, and When It Does Not

It makes sense when you have no pension, your essential expenses exceed Social Security, you are in good health with longevity in the family, and the idea of managing withdrawals through a market crash keeps you up at night. A simple single-premium immediate annuity from a highly rated insurer is the cleanest version.

It does not make sense when the contract carries surrender charges of 5-10% for the first 7-10 years, annual fees above 1%, or riders you do not understand. Variable and indexed annuities are where most of the bad outcomes happen. Also avoid annuitizing money you may need for a large expense, because the decision is irreversible.

Inflation risk is the quiet danger. A level $3,300 payment buys what $1,830 buys today after 20 years of 3% inflation. Either buy an inflation-adjusted contract, keep a growth portfolio alongside the annuity, or ladder purchases over several years so later contracts start at higher payments.

Avoid These Costly Mistakes

❌ Annuitizing the entire nest egg and leaving no liquid emergency reserve
❌ Comparing an insurer's payout rate to a bond yield as if both were pure return
❌ Ignoring inflation on a level payment that must last 20-30 years
❌ Buying a variable or indexed annuity without reading the fee and surrender schedule
❌ Taking a single quote instead of comparing several highly rated insurers
❌ Forgetting that payments from a 401(k) or traditional IRA annuity are fully taxable

Your Payout Planning Action Plan

Add up essential monthly expenses and subtract Social Security and pension income to find your gap
Use the "Lump sum needed" mode to see how much capital closes that gap
Run the "How long will it last" mode on your current balance at the withdrawal you want
Test a 2-3% annual increase to see the cost of inflation protection
Compare the level payout to a 4% withdrawal and decide how much, if any, to annuitize
Get quotes from at least three insurers rated A or better and check surrender terms before signing

Frequently Asked Questions

About $3,300 a month for 20 years if the balance earns 5% during the payout, or roughly $2,680 a month if you stretch it to 30 years. At 4% the 20-year figure drops to about $3,030; at 6% it rises to about $3,580. A lifetime annuity from an insurer pays somewhat less than the 20-year figure for a 65-year-old because the insurer must fund payments for as long as you live.

An annuity payout gives a higher, guaranteed income; the 4% rule keeps your principal invested and available to heirs. On $500,000, the 4% rule produces about $1,670 a month with the balance intact, while a 20-year period-certain payout at 5% produces about $3,300 a month but leaves nothing at the end. Many retirees annuitize just enough to cover fixed expenses and keep the rest invested.

Yes, at least partly. Payments from an annuity bought inside a 401(k) or traditional IRA are fully taxable as ordinary income. For an annuity bought with after-tax money, each payment is split into a tax-free return of your principal and a taxable earnings portion, using an exclusion ratio the insurer reports on Form 1099-R.

It depends on the payout option chosen. A period-certain payout continues to a named beneficiary for the remaining years. A life-only annuity stops at death with nothing to heirs, which is why it pays the most. Joint-and-survivor and life-with-period-certain options continue payments to a spouse or guarantee a minimum number of years in exchange for a lower monthly amount.

You can outlive a period-certain payout, but not a lifetime annuity. This calculator models a fixed number of years drawn from your own balance, so the money is gone when the term ends. Insurers sell lifetime versions that keep paying no matter how long you live, funded by pooling risk across many annuitants, which is the main reason to buy one instead of self-managing withdrawals.

A fixed annuity pays a set amount; a variable annuity's payments rise and fall with the investments inside it. Fixed payouts are predictable but lose purchasing power to inflation. Variable annuities offer growth potential but carry higher fees, often 2-3% a year, and the income can shrink in a bad market. This calculator models a fixed payout with an optional annual increase.