How is an annuity payout calculated?

PMT = PV × r / [1 − (1+r)^(−n)], where PV is the lump sum, r is the periodic rate, and n is the number of payments. The formula is the same one used for mortgage payments — except instead of paying down a loan you're drawing down a savings balance over time.

What's the difference between a period-certain annuity and a life annuity?

Period-certain pays a fixed amount for a set number of years (10, 20, 30) regardless of how long you live. If you die early, payments continue to your beneficiary; if you outlive the period, payments stop. Life annuity pays until death — the insurance company absorbs longevity risk in exchange for a smaller monthly check. Joint-life pays until both spouses die.

How does this compare to the 4% rule?

The 4% (Bengen) rule withdraws 4% of the starting balance in year one, then adjusts each year for inflation — designed for 30-year horizons with mixed stock/bond portfolios. The period-certain math here uses level payments at a fixed return — simpler, more deterministic, but doesn't keep up with inflation. For real retirees, the 4% rule is more realistic for long horizons; period-certain works for shorter, defined-horizon needs.

What interest rate should I use?

For a commercial fixed annuity, use the quoted rate from the issuer (typically 4-6% for current new issues). For self-managed drawdown, use a conservative expected return aligned with your portfolio — 4-5% for bond-heavy retiree portfolios, 5-7% for 60/40, 6-8% for stock-heavy. Always model multiple scenarios.

Will my nest egg last forever at the calculator's rate?

No — period-certain payouts intentionally deplete the principal. At the end of the payout period, balance is zero. If you want perpetual income, use a smaller withdrawal (3-4% of balance) and the principal can theoretically last indefinitely if real returns exceed withdrawals.

Are annuity payouts taxable?

Yes — payouts from qualified accounts (traditional IRA/401k) are fully taxable as ordinary income. Payouts from non-qualified annuities use an 'exclusion ratio' to separate return-of-principal (tax-free) from earnings (taxable). Roth IRA payouts after age 59½ are completely tax-free. Always model after-tax payouts for budgeting.

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Formula:
PMT = PV × r / [1 − (1+r)^(−n)]
Where PV = balance, r = rate per period, n = total periods
Total Received = PMT × n
Interest Earned = Total Received − Initial Balance

The payout math is identical to a mortgage amortization in reverse: instead of repaying a balance to a bank over time, you're being repaid your own balance (plus interest) over time. The trade-off is fundamental — longer payout periods mean smaller checks, and higher assumed returns mean larger checks but more risk that returns disappoint.

How the payout amount is calculated

PMT = PV × r / [ 1 − (1+r)⁻ⁿ ]

PV = lump sum balance
r = periodic rate (annual ÷ frequency)
n = total payments (years × frequency)

For a $500,000 balance, 5% annual return, 25-year monthly payout: r = 0.05/12 = 0.004167, n = 300. PMT = $500,000 × 0.004167 / (1 − 1.004167^-300) = $2,923/month. Total received over 25 years = $876,890. Interest earned during payout = $376,890.

Monthly income by balance and payout horizon

Balance	5% / 20yr	5% / 25yr	5% / 30yr	4% rule (mo)
$250,000	$1,650	$1,461	$1,342	$833
$500,000	$3,300	$2,923	$2,684	$1,667
$750,000	$4,950	$4,384	$4,026	$2,500
$1,000,000	$6,600	$5,845	$5,368	$3,333
$2,000,000	$13,200	$11,691	$10,736	$6,667

Notice: period-certain payouts are notably higher than 4% rule equivalents, because the principal is intentionally depleted by year n. The 4% rule preserves principal in real terms, providing inflation-adjusted income indefinitely.

The four standard annuity payout options

Period-Certain (10/20/30 years): Fixed period, level payments, beneficiary inherits remaining payments if you die early. Used as a defined-horizon income source — e.g., bridging Social Security delay.
Single Life Annuity: Payments until you die. Highest monthly income for a single individual but stops at death — no inheritance.
Joint and Survivor Annuity: Payments until both spouses die. Lower monthly income than single life; protects surviving spouse. Often required for pensions of married workers.
Life with Period-Certain: Hybrid — pays until death but guarantees minimum 10 or 20 years of payments. Compromise option.

When to use period-certain math vs the 4% rule

Period-certain works when: You have a defined-horizon need (a specific number of years), you accept that principal will deplete, and the income amount doesn't need to keep pace with inflation. Example: bridging the gap from age 60 retirement to age 70 Social Security claiming.

The 4% rule works when: You need lifelong inflation-adjusted income from a stock/bond portfolio. Bengen's original 1994 research found 4% with annual inflation adjustments survived 30 years in 100% of historical periods for a 50-75% stock portfolio. Updated research (Pfau, Kitces) suggests 3.3-3.8% may be more conservative for current low expected returns.

Tax treatment of payouts

Traditional 401(k) / IRA payouts: Fully taxable as ordinary income. Watch the RMD requirements after age 73 (or 75 under SECURE 2.0 starting 2033).
Roth IRA payouts after 59½: Completely tax-free.
Non-qualified annuity payouts: Exclusion ratio splits each payment into return-of-principal (tax-free) and earnings (ordinary income tax).
Pension payouts: Generally fully taxable; may have state-tax exemptions.

FAQ

What happens if the interest rate is wrong?

If actual returns are lower, you'll run out of money before the period ends. If higher, you'll have residual balance at end. Build conservative buffers and revisit yearly.

Can I change the payment after starting?

Self-managed drawdown: yes, freely. Commercial annuity contract: rarely without surrender charges. Read the contract before purchasing a fixed annuity.

What about variable annuities?

Variable annuities have unit-value-based payouts that fluctuate with underlying investments. This calculator assumes fixed payouts; variable annuities require Monte Carlo modeling.

Does this work for required minimum distributions?

Not directly — RMDs are calculated using IRS life-expectancy tables, not period-certain math. Use the IRS Uniform Lifetime Table or Joint Life Table for actual RMD amounts.

What if I want a perpetuity (no depletion)?

Perpetuity payment = Balance × Interest Rate. At $500K with 5% real return, perpetual income ≈ $25K/year ($2,083/month) — much less than the 25-year amortizing payout because you keep all principal.

How do I model joint life expectancy?

Joint life (two people) has higher expected payout duration than single life. For a 65-year-old couple, joint expectancy is roughly 27 years (vs ~20 single). Use 28-30 year horizons for joint-life period-certain modeling.

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Sources

Educational only; not investment or insurance advice. Reviewed by David Roehrig, ChFC®, on March 2, 2026.