Turning a lump sum into a monthly income
An immediate annuity takes a capital sum today and pays it back, with interest, as a fixed monthly amount for a fixed number of years. This calculator gives that monthly figure for a principal, a rate and a term, plus what is paid out in total and how much of it is interest rather than your own money.
The formula
It is the mortgage formula run in reverse: you are the lender, the insurer or the account is the borrower, and the payments amortise your capital to zero.
Worked example: $200,000 at 5% for 20 years
- Monthly payment: $1,319.91
- Paid out over 20 years: $316,779
- Of which interest: $116,779 — 58% more than the capital
Term and rate
| Principal | Rate | Years | Monthly |
|---|---|---|---|
| $200,000 | 5% | 20 | $1,320 |
| $200,000 | 5% | 25 | $1,169 |
| $200,000 | 4% | 20 | $1,212 |
| $200,000 | 5% | 15 | $1,582 |
Five more years cost $151 a month; one point of rate costs $108. The term is the bigger lever, and it is also the risk: a 20-year term on a 65-year-old ends at 85, and a quarter of 65-year-olds live past 90.
Period-certain against lifetime
What this calculator prices is a period-certain annuity: a fixed number of payments, to you or your estate. A lifetime annuity pays until death, however long, and insurers price it on mortality tables — for a 65-year-old the quote is typically 10–15% lower per month than the 20-year figure, because some buyers will collect for 30 years. The lower payment buys the one thing a period-certain product cannot: the guarantee of not outliving it.
The rate is not what you think
Insurers quote a "payout rate" — annual payments as a percentage of the premium. On the example that is $15,839 / $200,000 = 7.9%. It looks like a return; it is mostly your own capital coming back. The actual interest rate embedded is 5%, and a quoted 7.9% payout with a 3% embedded rate would be a much worse contract.
What this calculator leaves out
Inflation — $1,320 in year 20 buys what about $800 buys today at 2.5%; insurer fees, which lower the embedded rate; tax, since part of each payment is interest; and the credit risk of the insurer over 20 years.
Related calculators
- Annuity payout calculator — annual payments from a balance
- Present value of an annuity — what a stream of payments is worth today
- Retirement withdrawal calculator — the same question without the insurer