Annuity Calculator
Model the two phases of an annuity — accumulation (saving into it) and payout (drawing income from it). See how much income a lump sum generates, how long your money lasts, and whether a lump sum or annuity payout is the better deal.
| Rate | Monthly Payment | Annual Income | Total Payouts | Total Interest |
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| Year | Start Balance | Payouts | Interest | End Balance |
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How to Use This Annuity Calculator
Choose a mode based on what you want to solve for. Payout mode answers “How much monthly income does my lump sum generate?” — enter your starting balance, the interest rate, and how long you need payments. Accumulation mode answers “How much will I have after saving for X years?” — useful for modeling the growth phase of a deferred annuity. Duration mode answers “How many years will my money last at this withdrawal rate?”
The interest rate represents the annuity’s credited rate or assumed growth rate. Fixed annuities offer guaranteed rates (typically 3–5%), while variable annuities fluctuate with the market. The optional inflation adjustment increases payouts annually to maintain purchasing power — important for long payout periods.
The Lump Sum vs Annuity tab helps with a common retirement decision: should you take a pension or 401(k) as a lump sum or as an annuity stream? It compares both options side by side.
Annuity Payment Formulas
where PV = principal, r = rate per period, n = total periods
These are the same time value of money formulas used in bond pricing, mortgage calculations, and present value analysis. An annuity is simply a stream of equal payments — the math works identically whether you’re receiving payments (retirement income) or making them (loan repayment).
Types of Annuities
| Type | Rate | Risk | Income | Best For |
|---|---|---|---|---|
| Fixed Annuity | Guaranteed (3–5%) | Very low | Predictable, level payments | Conservative retirees wanting certainty |
| Variable Annuity | Market-linked | Moderate-high | Fluctuates with investments | Those wanting market upside with income |
| Fixed Indexed Annuity | Linked to index, with floor | Low-moderate | Participation in gains, protected from losses | Balance of growth potential and safety |
| Immediate Annuity (SPIA) | Based on purchase | Low | Starts right away | Converting lump sum to instant income |
| Deferred Annuity | Accumulates tax-deferred | Varies | Starts at future date | Tax-advantaged growth before retirement |
The popular “4% rule” for retirement is essentially a self-managed annuity: withdraw 4% of your portfolio annually, adjusted for inflation. On $500,000, that’s $20,000/year ($1,667/month). A fixed annuity at 5% for 25 years on the same $500K pays about $2,922/month — higher income but with no remaining balance. The trade-off: an annuity gives you more income but no legacy. Self-managing gives you flexibility and a potential inheritance. Use the retirement calculator to model the self-managed approach.
Lump Sum vs Annuity: The Retirement Decision
When retiring with a pension or large 401(k), you often face a choice: take the money as a lump sum (invest it yourself) or as guaranteed monthly payments (annuity). Neither is universally better — it depends on your health, risk tolerance, other income sources, and market outlook.
| Factor | Lump Sum Wins When | Annuity Wins When |
|---|---|---|
| Life expectancy | Shorter-than-average health | Good health, family longevity |
| Investment skill | Comfortable managing investments | Prefer guaranteed, hands-off income |
| Other income | Already have Social Security, other pensions | Need reliable base income to cover essentials |
| Legacy goals | Want to leave inheritance | No dependents relying on your estate |
| Market outlook | Confident in above-average returns | Concerned about prolonged downturns |
Variable annuities often carry total annual fees of 2–3%+ (mortality charges, admin fees, fund expenses, rider costs). These fees reduce your effective return significantly. A variable annuity earning 7% gross but charging 2.5% in fees delivers only 4.5% net — which a low-cost index fund could beat with lower fees. Always compare the net-of-fee return. Fixed annuities are simpler and have lower implicit costs.
Related Tools
| Calculator | Use It For |
|---|---|
| Retirement Calculator | Full retirement modeling with withdrawal strategy |
| Present Value Calculator | Find the present value of any annuity stream |
| Future Value Calculator | Project accumulation phase growth |
| Compound Interest Calculator | Compare annuity growth vs self-managed investing |
| Inflation Calculator | See how inflation erodes fixed annuity payments over time |
| Savings Goal Calculator | Plan how much to save to fund an annuity purchase |
FAQ
What is an annuity?
An annuity is a financial product — or simply a series of equal payments — over a set period. In the insurance context, you give a company a lump sum and they pay you a fixed monthly income for a guaranteed period or for life. In the math context, any stream of equal periodic payments is an annuity: mortgage payments, pension income, bond coupons, or recurring withdrawals from a retirement account.
How much income does a $500,000 annuity provide?
At 5% for 25 years, a $500,000 annuity pays approximately $2,922/month ($35,065/year). For a 20-year period, it’s about $3,300/month. As a perpetuity (interest-only), it pays $2,083/month forever without touching the principal. The payout depends entirely on the interest rate and time horizon — higher rates and shorter periods mean higher payments.
What is the difference between a fixed and variable annuity?
A fixed annuity guarantees a set interest rate and predictable payments — low risk, lower potential return. A variable annuity invests in sub-accounts (like mutual funds) and your payments fluctuate with market performance — higher potential return but also higher risk and fees. Fixed indexed annuities are a hybrid: returns are linked to a market index but with a floor (typically 0%) so you can’t lose principal.
Should I take a lump sum or annuity from my pension?
It depends on your situation. Take the annuity if you need guaranteed income to cover basic expenses, expect to live a long time, or don’t want to manage investments. Take the lump sum if you’re confident investing it yourself, have shorter life expectancy, want to leave an inheritance, or already have enough guaranteed income from Social Security. The Compare tab shows both options side by side for your numbers.
What is a perpetuity?
A perpetuity is an annuity that pays forever — you only receive the interest and never touch the principal. Set the payout period to 0 in this calculator to see the perpetuity payment. It’s the simplest annuity formula: PMT = Principal × Rate. A $500,000 perpetuity at 5% pays $25,000/year ($2,083/month) indefinitely.
How does inflation affect annuity payments?
Fixed annuity payments lose purchasing power over time. A $3,000/month payment today buys $3,000 of goods. In 20 years at 3% inflation, that same $3,000 only buys $1,660 worth. This is why inflation adjustment matters for long payout periods. Set the inflation field to 2.5–3% to model payments that increase annually to maintain real purchasing power — but note this reduces the initial payment amount.
What fees do annuities charge?
Fixed annuities have low explicit fees (often none — the company profits from the spread between what they earn and what they credit you). Variable annuities typically charge 2–3%+ annually: mortality and expense charges (~1.25%), admin fees (~0.15%), fund expenses (~0.5–1.5%), plus optional rider costs. These fees compound and dramatically reduce long-term returns. Always compare net-of-fee returns.
Can I model a COLA (cost-of-living adjustment) with this calculator?
Yes — use the “Inflation Adjustment” field. Enter 2–3% to model payments that increase annually, similar to a COLA. This increases each year’s payment but reduces the initial payment amount (since the annuity must fund higher future payments from the same principal). Social Security uses a COLA; many pensions do too.
Key Takeaways
- An annuity converts a lump sum into a predictable income stream — the trade-off is certainty (guaranteed payments) vs flexibility (managing money yourself).
- Higher rates and shorter periods mean higher payments — a 5% annuity over 20 years pays more monthly than the same annuity over 30 years.
- Inflation erodes fixed payments over time — $3,000/month loses nearly half its buying power over 20 years at 3% inflation. Consider inflation-adjusted payments for long horizons.
- Perpetuity pays interest-only forever — the principal stays intact. This is the most conservative approach but provides the lowest payment.
- Watch annuity fees — variable annuities often charge 2–3%+ in total fees. Compare the net return against low-cost index funds before committing.
- The lump sum vs annuity decision is personal — it depends on health, risk tolerance, other income, and legacy goals. There’s no universal “right” answer.