Annuity Calculator

How the Annuity Calculator Works

Our annuity calculator computes the monthly payout you'd receive from a lump-sum principal paid out over a fixed term at a given annual rate. It also shows the total amount paid out over the term, the total interest earned on the declining balance, and a year-by-year remaining balance so you can see how the principal is drawn down over time.

Annuity Payout Formula

The monthly payout is calculated using the annuity payout (amortization) formula:

PMT = P × [ r(1+r)ⁿ ] / [ (1+r)ⁿ − 1 ]

Where:

• PMT = Monthly payout
• P = Principal (initial lump sum)
• r = Monthly rate (annual payout rate ÷ 12)
• n = Total number of payments (years × 12)

For example, a $200,000 principal paid out over 20 years at a 5% annual rate produces a monthly payout of about $1,320. Over the 240-month term you'd receive roughly $316,800 in total payouts — about $116,800 of which is interest earned on the declining balance.

How the Remaining Balance Declines

Each month, the payout is split between interest earned on the remaining balance and principal drawn down. Early in the term, the balance is large, so most of the payout is interest and the principal shrinks slowly. As the balance falls, the interest portion shrinks and more of each payout comes from principal. By the final years, almost the entire payout is principal. The remaining-balance table in the results shows this curve year by year.

Fixed-Term vs. Lifetime Annuities

This calculator models a fixed-term annuity, which pays out over a set number of years and reaches a zero balance at the end. A lifetime annuity, by contrast, pays out for as long as you live — the insurer pools risk across many policyholders and absorbs the cost if you live longer than expected. Lifetime annuities typically pay less per month than a fixed-term annuity with the same principal because of that longevity insurance. When comparing, note that the payout rate on a lifetime annuity is not directly comparable to the rate on a fixed-term product.

What the Annual Payout Rate Means

The annual payout rate is the rate used to grow the balance each month before the payout is withdrawn. A higher rate produces a higher monthly payout because more interest is earned to offset the withdrawals. In a real annuity contract, this rate is set by the insurer and may be fixed or variable. The rate you enter here should reflect the rate the insurer quotes — not a market return you hope to earn — because the insurer, not you, is bearing the investment risk.

Tips for Evaluating an Annuity

• Compare the monthly payout to what you could withdraw yourself from a similar investment.
• Ask whether the rate is fixed for the whole term or can change.
• Check for surrender charges if you might need the money early.
• Consider inflation — a fixed payout loses purchasing power over time.
• Understand whether payouts continue to a beneficiary after death.
• Factor in any fees or insurer margins that reduce the effective payout.