How the Annuity Payout Calculator Works
An annuity is a pot of money that first grows, and then pays you a regular income. Many people use one to turn their savings into a steady monthly payment in retirement. The Annuity Payout Calculator works in two steps. First it grows your balance until the payouts start. Then it works out the monthly payment that would use up the balance over the number of years you choose.
What you enter
- Your age now, and the age when the payouts start. The time between them is the saving stage. If the two ages are the same, you already have the money and there is no saving stage.
- Current balance and monthly deposit: what you have now, and what you add each month until the payouts start.
- Yearly return until then: the growth rate you expect while you save.
- How many years the payouts last, and the yearly return during the payouts. The return is often lower here, because the money is usually held more safely.
- When the payouts are made: at the end of each month, or at the start. Payments at the start are a little smaller, because each one is paid a month earlier.
How the results are worked out
Step 1 is the growth. Here r is the monthly return before the payouts (the yearly return divided by 12) and n is the number of months of saving:
value at the start = balance x (1 + r)^n + deposit x ((1 + r)^n - 1) / r
Step 2 is the payout. Here q is the monthly return during the payouts and m is the number of months of payouts:
monthly payout = value x q / (1 - (1 + q)^-m)
This is the same formula as a loan payment. You can think of it as the bank borrowing your balance, and paying it back to you, with interest, in equal monthly payments.
A worked example
You are 30, with $25,000. You deposit $500 a month until 65, and earn 7% a year. From 65, the money is paid out over 25 years, while it earns 5% a year.
| Result | Amount |
|---|---|
| Money you put in ($25,000 + $500 x 420 months) | $235,000.00 |
| Value at age 65 | $1,188,181.10 |
| Growth before the payouts | $953,181.10 |
| Monthly payout for 25 years | $6,945.99 |
| Yearly income | $83,351.88 |
| Total paid out by age 90 | $2,083,796.51 |
Most of the balance at 65 is growth, not deposits. That is the effect of time: money that is invested for 35 years grows on its own growth.
Chart: your balance by age
Age 40 █████ $136,784 Age 50 ████████████ $361,432 Age 60 ███████████████████████████ $812,898 Age 65 ████████████████████████████████████████ $1,188,181 Age 70 ███████████████████████████████████ $1,052,493 Age 80 ██████████████████████ $654,877 Age 90 $0
The calculator draws this as a line. It rises while you save, reaches its top when the payouts start, and falls to zero at the end of the payout period.
What changes the payout
The number of years matters a lot. The same $1,188,181 at 5%:
| Payout period | Monthly payout |
|---|---|
| 10 years | $12,602.50 |
| 20 years | $7,841.47 |
| 25 years | $6,945.99 |
| 30 years | $6,378.41 |
The return during the payouts matters too. The same balance, paid over 25 years:
| Return during the payouts | Monthly payout |
|---|---|
| 3% | $5,634.49 |
| 5% | $6,945.99 |
| 7% | $8,397.82 |
Fixed-period payout, or lifetime payout?
This calculator pays out over a fixed number of years. If you live longer than that, the money is gone. A lifetime annuity from an insurance company is different: it pays for as long as you live, and the payment depends on your age, your sex and the company's rates. For a lifetime payout, get a quote from an insurer. You can use this calculator to compare it with a fixed-period payout.
Tips
- Start early. Waiting 10 years to start saving can cut the final balance by half or more.
- Be careful with high returns. A return of 7% is not guaranteed. Try a lower figure, such as 4% or 5%, to see a more cautious result.
- Plan for a long life. A payout period that ends at 85 may be too short. Many people live into their 90s.
- Think about inflation. A monthly income of $6,946 will buy less in 25 years than it does today.
What this calculator does not include
- Taxes, fees and charges for the annuity, which lower what you receive.
- Inflation. The results are in dollars of the year they are paid.
- A return that changes from year to year. The calculator uses a steady rate.
- Payments that grow each year, and payments that continue for life or to a partner.
This tool gives an estimate for general information only. It is not financial or investment advice. A real annuity contract sets its own rates, fees and payouts.