Annuity Payout Calculator

This annuity payout calculator answers two questions about a lump sum: what it pays you each period, and how long the payments last. Choose Fixed length to set the number of years and get the payment. Choose Fixed payment to set the withdrawal and get the duration. A $500,000 balance earning 6% pays $5,511.20 a month for 10 years; withdraw $5,000 a month from that same balance and it lasts 11.45 years, or 138 payments. The table below traces the balance down to zero year by year.

Qualified and non-qualified annuities

The label decides how your payments are taxed, and it comes down to whether the money went in before or after tax. A qualified annuity sits inside a tax-advantaged retirement plan: an IRA, a 401(k), a 403(b), a Keogh plan, a Thrift Savings Plan, a SEP, or a defined benefit pension. Contributions are made with pretax dollars and reduce your taxable income in the year you make them. The trade comes later, because every dollar that comes back out is taxed as ordinary income, principal included.

A non-qualified annuity is bought with money you have already paid tax on. Only the earnings are taxable when they come out; the principal returns to you tax-free, since it was taxed on the way in. Two other differences matter in retirement. Non-qualified contracts have no required minimum distributions, so the IRS does not force money out of them at 73 the way it does with a traditional IRA or 401(k). They also have no contribution cap and no limit on how many contracts you hold, which is why they get used as an overflow once the qualified accounts are full.

Plan rules still govern a qualified annuity and can override the contract terms. Features written into the annuity itself, such as a guaranteed death benefit that pays out regardless of what the account is worth, normally survive. If you are weighing an annuity against the accounts feeding it, the 401(k) Calculator and the IRA Calculator project those balances.

Early withdrawals and the 10% penalty

Take money out before age 59 and a half and the IRS adds a 10% penalty on top of ordinary income tax on the taxable portion. Earnings inside any annuity grow untaxed until you withdraw them, so the penalty applies to growth you have never been taxed on.

Order of withdrawal decides how much is taxable. A non-qualified annuity bought after August 13, 1982 pays out on a last-in, first-out basis, so earnings come out first and the early dollars are fully taxable. Your principal only starts coming back once the earnings are exhausted. On a $150,000 contract with a $100,000 basis, the first $50,000 withdrawn is all taxable income.

The insurer has its own charge on top of the tax. Most contracts run a surrender schedule for the first six to eight years, often starting near 7% of the amount withdrawn and stepping down a point a year to zero. Most also allow a free withdrawal each year, commonly 10% of the account value, that escapes the surrender charge entirely.

Several situations lift the 10% federal penalty:

• Death of the contract owner, where the money passes to a beneficiary
• Permanent disability of the annuitant
• A terminal illness diagnosis
• A schedule of substantially equal periodic payments under section 72(q), the non-qualified equivalent of 72(t)
• Qualifying long-term care costs, where the contract carries a rider covering them

The three phases of an annuity

Every annuity moves through three stages: accumulation, annuitization, and payout. The first builds the money, the second is the moment you convert it, and the third is what this calculator prices.

Accumulation phase

Accumulation is the stretch where the contract builds value, and it starts the moment the first dollar goes in. Funding comes as a single lump sum or as a run of payments, and the choice tracks where you are in life. Someone at or near retirement usually pays a lump sum so income can start quickly. That contract is an immediate annuity, and payments typically begin within 12 months, which leaves it almost no accumulation phase at all. A worker in their forties is more likely to fund a deferred annuity over years and let the balance grow.

Growth does not stop when accumulation ends. Assets stay invested through annuitization and payout, whether the contract is fixed, indexed, or variable, and the balance keeps earning while it is being drawn down. That is exactly what the interest column in the table below shows. Earnings compound without tax until you withdraw them. The Investment Calculator models the same growth in a taxable account for comparison.

Annuitization phase

Annuitization is a single event rather than a stretch of time, and it separates the other two phases. It is the point where the insurer stops taking your money and starts sending it back on a schedule. In a variable annuity it is also the point where the accumulation units you have bought convert into annuity units that determine each payment.

The decision is final. Once a contract is annuitized you cannot switch to a different payout shape or reach the principal as a lump sum, which is why the payout option you pick at this moment deserves more thought than any other choice in the contract.

Payout phase

The payout phase is the stage this calculator prices, and it runs from annuitization until the money or the annuitant runs out. Payments can arrive monthly, quarterly, semiannually, or annually, and the length depends on the payout amount and the balance built during accumulation. As with annuitization, the frequency and shape are locked once applied.

Tax treatment in this phase depends on how you take the money. Annuitize a non-qualified contract and each payment splits into a tax-free return of principal and a taxable earnings share, set by an exclusion ratio the insurer calculates from your basis and expected total payments. Take withdrawals without annuitizing and the last-in, first-out rule applies instead, so payments are fully taxable until you have drawn out all the earnings and reached your original principal.

1035 exchanges

Section 1035 of the Internal Revenue Code lets you swap one contract for another without the IRS treating it as a sale, so no tax falls due at the time of the transfer. The provision exists because replacing a contract is not the same as cashing it in.

People use it when the original contract has been overtaken by events. Fees on newer contracts may be lower, riders may be better, and rising life expectancy across the population has pushed insurance costs down over time. Someone who no longer needs life cover can move the cash value into an income annuity, giving up the death benefit but ending the premiums and locking in income for a set period.

The IRS treats only these swaps as tax-free:

• An annuity contract for another annuity contract, or for an annuity carrying long-term care benefits
• A life insurance contract for another life insurance contract, an endowment contract, or an annuity contract
• An endowment policy for an identical endowment policy that does not push back the date payments start, or for an annuity contract

Anything running the other way, such as trading an annuity for a life insurance policy, is a taxable event. The owner, the insured, and the annuitant on the new contract must also be the same people named on the old one.

Partial 1035 exchanges

A partial exchange moves part of a contract rather than all of it, and the cost basis follows pro rata instead of earnings-first. Exchange half the value and the new contract takes half the basis.

The arithmetic is worth walking through. Say you hold a $50,000 non-qualified deferred annuity with a $40,000 basis, leaving $10,000 of untaxed gain. Take a $10,000 distribution straight out and the full $10,000 is taxable, because earnings come out first. Move $25,000 into a second contract instead and you end up with two $25,000 contracts, each carrying a $20,000 basis. A $10,000 distribution from either one now produces $5,000 of taxable income rather than $10,000.

One timing rule protects this. No distribution may be taken from either contract within 180 days of the exchange. Pull money out inside that window and the IRS can treat the whole thing as a single transaction, taxing the income in both contracts rather than only the one that paid out. Partial exchanges are legal but not universal, and plenty of insurers decline to process them. The rules around both full and partial exchanges are detailed enough that a tax professional earns their fee here.

Payout options

Insurers offer six common payout shapes, and this calculator prices the two most popular: fixed length and fixed payment. Not every contract offers every option.

• Lump sum. The whole account value in one withdrawal. No 10% penalty applies after 59 and a half, but the entire taxable amount lands in a single tax year, which usually pushes you into a higher bracket and makes this the costliest option on tax alone.
• Fixed length, also called period certain. You choose the number of years and the insurer sizes the payment to empty the balance over that span, commonly 10, 15, or 20 years. A 60-year-old on a 10-year period certain has payments guaranteed to about age 70. Death before the end does not cancel anything; whatever is left goes to your heirs.
• Fixed payment amount. You choose the amount and the balance decides the duration. The Fixed payment tab above solves for that duration, and it is the mirror image of the same risk: too large an amount and you outlive the annuity, too small and you die with money sitting in it.
• Life only. The insurer pays for as long as you live, with the amount set by life expectancy. Longer expectancy means smaller payments. Die in year two and the remaining funds are gone; live well past expectancy and you collect more than the contract was ever worth.
• Joint and survivor. Payments continue for a spouse after the main annuitant dies, priced on both lives, so each payment is smaller than the life-only figure. A joint life with last survivor version can cover a third person, such as a dependent child. Our Pension Calculator compares the same single-life against joint-and-survivor trade-off on a pension.
• Life with period certain. Income for life, plus a guaranteed window, often 10 years, during which a named beneficiary keeps receiving payments if you die early. Die after the window closes and the beneficiary gets nothing.

Fixed, indexed, and variable annuities

Three contract types set the rate you should enter, and they carry very different risk. A fixed annuity pays a rate the insurer guarantees for a stated term, often three to ten years, so the payout is predictable and the insurer absorbs the market risk. Rates track what insurers can earn on high-grade bonds, which puts them in the same territory as a multi-year CD.

An indexed annuity ties growth to a market index such as the S&P 500, with a floor of 0% in losing years and a ceiling on the gains. The ceiling arrives as a cap, a participation rate, or a spread. A 60% participation rate on a 10% index year credits 6%; a 7% cap on that same year credits 7% and no more. The floor is real protection, and the cap is what pays for it, so long-run returns land between fixed and variable.

A variable annuity puts the money in subaccounts that work like mutual funds, so the balance rises and falls with the market and the payout can shrink. Total costs typically run 2% to 3% a year once the mortality and expense charge, administrative fees, and fund expenses are added up, which is the highest of the three. Riders that guarantee a minimum income add more.

Choosing the rate to enter

Enter the rate your contract actually credits after fees, not a market average. That distinction moves the answer more than most people expect. On $500,000 withdrawn at $5,000 a month, a 6% net return lasts 11.45 years, while 4% lasts 10.11 years and 2% lasts 9.12 years. Losing two points to fees costs well over a year of income.

For a fixed annuity the figure is stated in the contract, so use it directly. For an indexed contract, model something below the cap rather than the cap itself, since the cap only applies in strong years and the floor years credit nothing. For a variable annuity, start from the expected return of the underlying funds and subtract the mortality and expense charge, the administrative fee, the fund expense ratios, and the cost of any income rider. What is left is the number that belongs in the field above.

How this calculator works

The calculator converts your annual rate into a rate for the payout period, then runs standard annuity math on it. A 6% annual return paid monthly becomes a periodic rate of 0.4868%, not 0.5%, because the conversion uses the effective annual rate:

i = (1 + r)^1/f - 1

Here r is the annual rate and f is the number of payouts per year. On the Fixed length tab, the payment comes from the present-value-of-an-annuity formula, where P is the starting principal and n is the total number of payouts:

A = P x i / (1 - (1 + i)^-n)

On the Fixed payment tab the same relationship is solved the other way, for the number of periods your chosen payment A can support:

n = -ln(1 - P x i / A) / ln(1 + i)

That n rarely lands on a whole number, so the last payment is a stub rather than a full amount. Taking $5,000 a month from $500,000 at 6% gives 137.36 periods: 137 full payments of $5,000 and a final partial one, which is why the total of 138 payments comes to less than 138 times $5,000. If your chosen payment is smaller than the interest the balance earns each period, the calculator says so, because the balance grows instead of draining and no finite answer exists. At 6% on $500,000 that threshold is about $2,434 a month.

The table and both charts run a period-by-period simulation rather than a formula, so the interest column reflects the actual declining balance. To work backward from an income target to the lump sum you would need, use the Present Value Calculator, and to see whether your savings will reach that number, the Retirement Calculator covers the accumulation side.