Annuity Payout Calculator

The calculation assumes the rate is an effective annual return earned evenly through the year and that each payment is taken at the end of its period. It ignores taxes, fees and inflation, and it treats the payout as drawing down your own balance, like a systematic withdrawal plan. Insurance companies pricing a lifetime annuity also factor in life expectancy and their own costs, so actual quotes will differ. With the defaults, $500,000 earning 6% a year supports $5,511.20 a month for 10 years; withdrawing $5,000 a month instead makes it last about 11 years and 6 months.

Qualified vs. Non-Qualified Annuities

How annuity payouts are taxed depends on where the money came from. A qualified annuity is funded with pre-tax dollars, typically inside a 401(k), 403(b) or traditional IRA, or bought with a rollover from one. Because none of the money has been taxed, every dollar paid out is taxable as ordinary income. Qualified annuities are also subject to required minimum distributions, which generally must begin at age 73 for people born from 1951 to 1959 and at 75 for those born in 1960 or later.

A non-qualified annuity is bought with money you have already paid tax on. Only the earnings are taxable. During annuitization, the IRS exclusion ratio splits each payment into a tax-free return of your premium and taxable earnings. For example, if you paid $100,000 and expect to receive $150,000 in total, two-thirds of each payment is a tax-free return of principal until the full $100,000 has been recovered. Non-qualified annuities have no contribution limits and no required minimum distributions during the owner's life.

Withdrawals that are not annuitized, such as partial cash withdrawals, are generally treated as coming from earnings first in a non-qualified contract, so they are fully taxable until all gains have been withdrawn.

Early Withdrawals

Two separate costs can hit money taken out early. The insurer's surrender charge applies to withdrawals beyond the free amount (often 10% a year) during the surrender period, which usually lasts six to ten years. Separately, the IRS adds a 10% additional tax on the taxable portion of withdrawals made before age 59½, unless an exception applies, such as death, disability, or a series of substantially equal periodic payments. Taking payments that follow a fixed schedule, like the ones this calculator produces, can qualify for that last exception if the rules are followed carefully.

Phases of an Annuity

Every annuity moves through stages, and knowing which one you are in helps you choose the right calculations and options.

Purchase. You choose the type of annuity and fund it with a single premium or a series of payments. At this point you name the owner, the annuitant (whose life the payments are based on) and beneficiaries. A free-look period, typically 10 to 30 days depending on the state, lets you cancel for a refund.

Accumulation. For a deferred annuity, the money grows tax-deferred, at a fixed rate, an index-linked rate, or with the performance of investment subaccounts. This phase can last from a year to several decades, and you can often add money if the contract allows it. Surrender charges usually apply during the early years, so this is money you should not need in the short term. The annuity calculator projects this stage.

Distribution. Once you want income, you can take it in one of two broad ways. With systematic or partial withdrawals, you keep ownership of the account, withdraw what you need, and any remaining balance passes to beneficiaries; but nothing guarantees the money lasts. With annuitization, you hand the balance to the insurer in exchange for a guaranteed stream of payments; the decision is usually irreversible, and the account value no longer belongs to you. Many modern contracts add a third route: a guaranteed lifetime withdrawal rider that promises income for life while you keep access to the remaining balance.

Several factors determine how large the payments are:

• The account value at the time payouts begin.
• Your age and, for joint contracts, your spouse's age; older annuitants receive larger payments because fewer are expected.
• Interest rates when you annuitize; higher rates mean higher payouts.
• The payout option, such as life only, a guaranteed period, or joint and survivor.
• Any inflation adjustment or rider, which lowers the starting payment in exchange for later increases or guarantees.
• How often you are paid; monthly payments are slightly smaller per year than one annual payment because money leaves the account sooner.

Payout Options

When you annuitize, you choose how payments are structured. Each option balances the size of the payment against what happens if you die early.

Life only (straight life). Payments continue for as long as you live and stop at death. This produces the highest payment for a given premium, but nothing is left for heirs, even if you die shortly after payments begin.

Life with period certain. Payments last for life, but if you die within a guaranteed period, such as 10 or 20 years, your beneficiary receives the remaining payments. The guarantee lowers each payment somewhat.

Joint and survivor. Payments continue as long as either of two people, usually spouses, is alive. The survivor may receive the full payment or a reduced share, such as 50% or 75%; the larger the survivor share, the smaller the payment while both are alive.

Period certain (fixed period). Payments last for a set number of years regardless of whether you live or die, which is exactly what the fixed-length mode of this calculator computes.

Fixed amount. You choose the payment size, and payments continue until the money, plus earnings, runs out, as in the fixed-payment mode above.

Lump sum. You can also simply withdraw everything at once, paying any surrender charges and taxes on the gain, but giving up the income guarantee.

PMT = PV × r ÷ [1 − (1 + r)⁻ⁿ]

PMT

payment each period

PV

starting principal

r

return per payout period: (1 + annual rate)^(1/f) − 1

n

number of payments

For a fixed payment, the number of payments is n = −ln(1 − PV × r ÷ PMT) ÷ ln(1 + r). Payments are made at the end of each period.

Frequently asked questions

Sources

• IRS – Topic No. 410, Pensions and Annuities
• IRS Publication 939 – General Rule for Pensions and Annuities
• Investor.gov – Introduction to Investing