What a lump sum pays out each year
An annuity converts capital into a stream of level payments. This calculator answers the most common form of the question: given a sum and a return, what can be drawn each period until the capital is exhausted?
The formula
It is the loan payment formula. A lender and an annuitant face the same arithmetic from opposite sides: a balance that earns interest and pays out level amounts until it reaches zero.
Worked example: $500,000 at 5% over 20 years
- Annual payment: $40,121
- Total paid out: $802,426
- Interest earned during the payout: $302,426
You receive 60% more than you started with, because the shrinking balance keeps earning throughout. In year one, $25,000 of that $40,121 is interest and only $15,121 comes from capital.
What the rate and term do
| Rate | 15 years | 20 years | 25 years |
|---|---|---|---|
| 3% | $41,880 | $33,610 | $28,712 |
| 5% | $48,171 | $40,121 | $35,476 |
| 7% | $54,879 | $47,196 | $42,916 |
Two points of return are worth about $7,000 a year on this capital. Five extra years of term cost about $4,600 a year. Both levers matter, and the rate is the one you cannot control.
Ordinary annuity or annuity due
The figures above assume payment at the end of each period — an ordinary annuity. If payment comes at the beginning, each one is received a year earlier and the amount is lower for the same capital: $38,211 rather than $40,121.
Pensions and rent are usually annuities due; loan repayments and bond coupons are ordinary. Check which convention a quote uses before comparing two.
What this calculator leaves out
Inflation. A level $40,121 buys about a third less after twenty years at 2%. Also mortality: a commercial life annuity pays until death rather than for a fixed term, which is a different product priced on life expectancy rather than on arithmetic alone.
Solving for the other unknowns
The same relationship answers the reverse questions. To fund $50,000 a year for 20 years at 5% you need $623,110 of capital. To make $500,000 last 30 years at 5%, the payment drops to $32,526.
Retirement planning usually runs in this direction: start from the income you need, work back to the capital required, and compare that against what you will actually have. The gap, not the payment, is the number that changes behaviour.
Fixed, variable and indexed
The arithmetic here describes a fixed annuity: a known rate producing a known payment. Two other products share the name and not the certainty.
A variable annuity ties the payment to investment performance, so the figure moves and can fall. An indexed annuity links returns to a market index with a cap and a floor, which limits the downside and the upside together. Both carry fees well above a fixed contract, and both are far harder to compare because the payment is not knowable in advance.
Related calculators
- Annuity payout calculator — the monthly version of this question
- Present value of annuity — capital needed for a chosen payment
- Perpetuity calculator — payments that never exhaust the capital