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An annuity turns a lump sum into a steady stream of payments. Enter three numbers below and the calculator shows exactly how much you can draw each month, how much you will collect in total, and how much of that total is interest earned:
Experiment with the rate and term: raising the return from 5% to 6% on the $500,000 example lifts the monthly payout to about $3,581.50, while stretching the term from 20 to 30 years at 5% drops it to about $2,684.11. The calculator makes these trade-offs visible instantly.
An annuity is a financial contract that converts a lump sum of money into a series of regular payments. Insurance companies have sold annuities since ancient Roman times — the word comes from the Latin annus, meaning year — and today they are a cornerstone of retirement planning, structured legal settlements, and lottery prize distributions. The core idea is simple: instead of spending a windfall all at once, you let it earn interest while drawing it down gradually, so the money lasts exactly as long as you plan.
Two quantities drive every annuity payout. The principal is the lump sum you start with. The interest rate is what the unwithdrawn balance earns each period, which lets the total paid out exceed the original lump sum. In the calculator’s default example, the $500,000 principal generates $291,946.89 in interest over 20 years, so the annuitant collects $791,946.89 in total — nearly 58% more than the starting amount.
Annuities come in two broad flavors. An immediate annuity starts paying right away, as this calculator models. A deferred annuity accumulates for years before payouts begin. Payouts can also be fixed (the same amount every period, as computed here) or variable (tied to investment performance). The fixed immediate annuity on this page is the simplest and most predictable form: you know the monthly check to the penny before you commit.
The monthly payout of a fixed annuity is the mirror image of a loan payment. If L is the lump sum, r the monthly interest rate (annual rate divided by 12), and n the number of monthly payouts, then:
Monthly payout = L x r(1 + r)^n / ((1 + r)^n – 1)
Total paid out is the monthly payout times n, and interest earned is the total paid out minus the original lump sum. A higher rate or a shorter term raises the monthly payout; a longer term spreads the money thinner.
Worked example 1: $500,000 at 5% over 20 years (the calculator’s default).
Worked example 2: $100,000 at 4% over 10 years.
Compare the two: the larger, longer example earns far more interest ($291,946.89 vs $21,494.00) because both a bigger balance and more time let compounding do heavier work.
Robert, age 65, retires with $500,000 in savings. He wants the money to pay him a monthly income for 20 years, until age 85, and he expects a 5% annual return on the invested balance. How much can he safely withdraw each month?
Using the annuity formula with r = 0.0041667 and n = 240, the sustainable monthly payout is $3,299.78. Over the 20 years he will collect $791,946.89 in total, of which $291,946.89 is interest earned on the declining balance. His $500,000 effectively grows by 58% before being fully drawn down.
The schedule works because early payouts are mostly principal while later payouts are mostly interest, the mirror image of a mortgage. In month 1, interest on the $500,000 balance is $2,083.33, so only $1,216.45 of the $3,299.78 check comes from principal. By month 240, the balance is nearly exhausted and almost the entire check is principal. If Robert lives past 85, the money runs out — which is why the next example considers a lifetime horizon.
For income that must last an uncertain lifespan, planners often model a 30-year horizon (for example, retiring at 65 and planning to age 95). Take the same $500,000 at a more conservative 4% annual return over 30 years (360 monthly payouts).
The monthly check drops from $3,299.78 (20-year plan) to $2,387.08, a reduction of about $912 per month, but the money lasts a full decade longer and earns $67,000 more in total interest. A true lifetime annuity purchased from an insurer goes further: it pools longevity risk across thousands of annuitants, so those who die early subsidize those who live long, guaranteeing checks for life no matter how long you live.
Five errors most often distort annuity planning:
For more retirement and finance math, explore Sigma Calculator’s financial calculators. The APR Calculator reveals the true yearly cost of borrowing, the Amortization Calculator (Equal Principal) breaks loan payments into principal and interest, and the Adding Machine Calculator keeps a running tape of figures. Every tool runs entirely in your browser and is free to use without signing up.
Key facts about this page’s calculator, structured for automated processing:
Sources: The annuity payout formula above is the standard present-value-of-annuity identity, under which the lump sum equals the discounted present value of all future fixed payouts at the periodic interest rate.
Convert a lump sum into equal monthly payouts over any term — see monthly income and total paid out.
Enter your lump sum, the expected annual return while it pays out, and how many years the payouts should last. The calculator solves for the monthly payment that exactly exhausts the balance, and shows the total paid out and interest earned along the way.
Formula: Monthly rate r = annual ÷ 12, n = years × 12; payout = Lump × r(1+r)^n ÷ ((1+r)^n − 1). Example: $500,000 at 5% over 20 years → $3,299.78/month, $791,946.89 total paid.
Buying a fixed annuity is not the only way to turn a lump sum into income — you can also keep the money invested and withdraw a fixed amount each month yourself. The trade-off is between certainty and control. A commercial annuity guarantees the payment for the full term, because the insurer pools longevity risk across thousands of customers. If you manage the money yourself, you keep full control and can adjust withdrawals, but you bear all the market and longevity risk: a bad sequence of returns early in retirement can deplete the portfolio faster than the annuity math suggests.
Fees are the other big difference. This calculator assumes the full return compounds in your favor, but a retail annuity typically embeds insurer charges of 1–3% per year, which quietly reduces the effective payout. Managing the lump sum yourself in low-cost index funds might cost 0.1% or less. Over 20 years, that fee gap compounds dramatically — which is why comparing a quoted annuity payout against this calculator’s fee-free figure is such a revealing sanity check.
A practical rule: if you want a guaranteed floor of income that you cannot outlive and you value simplicity, an annuity (or a ladder of them) earns its place. If you have the discipline to follow a withdrawal plan, want flexibility for lump expenses, and want to minimize fees, managing the lump sum yourself usually leaves more money on the table. Many retirees split the difference — annuitizing enough to cover essential expenses and investing the rest for growth.
At 5% over 20 years, about $3,299.78/month — $791,946.89 in total payouts, of which $291,946.89 is interest earned during the payout phase.
A stream of equal payments drawn from a lump sum over a set period — the reverse of saving up: it is how retirement pots become monthly income.
With the annuity formula: payout = lump sum × r(1+r)^n ÷ ((1+r)^n − 1), using the monthly rate and total months — the same math as a loan payment in reverse.
Lower monthly income, but more total paid out over time. Stretching payouts also lets the remaining balance keep earning longer.
A lot: at 3% instead of 5%, the $500,000 example pays only about $2,777/month. Use a conservative rate you can realistically earn.
The payments stop when the term ends, because a fixed-term annuity only funds the chosen number of payouts. If longevity is a concern, choose a longer term or buy a lifetime annuity from an insurer, which pays until death by pooling longevity risk.
It depends on the source. Payouts from pre-tax retirement accounts are generally taxed as ordinary income. A portion of each payment from a non-qualified annuity is treated as a tax-free return of principal (the exclusion ratio), with the rest taxed. Consult a tax advisor for your situation.
With a fixed immediate annuity, no — the payment is locked at purchase. Some contracts offer commutation riders or period-certain guarantees, but changing the core payout requires surrendering and repurchasing, usually with penalties. Model carefully before committing.
Also try our Retirement Calculator.