Annuity Payout Calculator

What this calculator tells you

An annuity payout calculator answers a different question from a present value calculator. It asks how much you can take out of a lump sum each year, for a set number of years, before the money runs out. This is the question many people face when they retire, inherit money, or sell a business and want an income from the proceeds.

The answer depends on three things: the amount you start with, the return the remaining balance earns, and how many years the payments must last. More money, a higher return, or fewer years all allow a larger yearly payment.

How the result is worked out

The calculator assumes the remaining balance earns a fixed annual return, and that each payment is taken at the end of the year. The yearly payment is PMT = PV × r ÷ (1 − (1 + r)⁻ⁿ), where PV is the starting sum, r the annual return and n the number of years. The payment is set so that the balance falls to exactly zero at the end of the period.

A worked example

Take 100,000 earning 5% a year, with payments to last 20 years. The yearly payment is about 8,024. The total paid out over the 20 years is about 160,485, which includes both the original sum and the interest it earned while it was being paid out.

The return is the key assumption

The payment is very sensitive to the return. If the balance earns less than assumed, it runs out early; if it earns more, a balance will remain. Because actual returns vary from year to year, it is wise to test a lower return than you expect. Ask what payment would still work if returns were a point or two lower.

Withdrawing a fixed amount is also different from earning a fixed return. If the investment falls sharply early in the payout period, a fixed withdrawal takes a larger share of what remains, which can shorten the period. This sequence risk is not captured by a single average return.

What the calculator leaves out

Inflation is not modelled. A payment that is fixed in cash terms buys less each year, so the real value of the income falls. Taxes on the withdrawals and the growth are excluded, as are fees charged by the provider or platform. These can reduce the effective return and the sustainable payment considerably.

Insurance annuities sold for retirement income often work differently. They may guarantee payments for life, pool risk among many buyers, and charge fees that are built into the price. This calculator covers a fixed-term payout from a lump sum you control, which is a different product.

Common mistakes when planning a payout

The most frequent error is treating the yearly payout as safe income when it depends on the balance earning the assumed return every year. A payout set on a 5% assumption can run short in a period of low returns, which is why it is worth testing a lower rate before committing a lump sum.

A second mistake is ignoring inflation. A fixed payment buys less each year, so the first payout may feel comfortable while later ones fall short of rising costs. Compare the payout with the cost of the expenses it must cover, both now and after a number of years.

Using the result

Use the calculator to set a realistic starting point, then review it regularly. Compare the yearly payment with your actual expenses, and check how much of it you would still have if markets fell. Many people build in a cushion, such as a separate emergency fund, so they are not forced to sell during a downturn.