Turning a lump sum into a monthly income
An immediate annuity answers a single, practical question: if I hand an insurer a lump sum today, how much income will it pay me each month? The mechanics are the mirror image of a mortgage. With a loan, you borrow a principal and repay it with interest in level instalments until the balance is gone. With a period-certain annuity, the insurer holds your premium, credits interest on the remaining balance, and pays it back to you in equal monthly amounts until, at the end of the chosen term, the balance reaches zero. The payment is larger when the premium is larger or the credited rate is higher, and smaller when the payout is spread over more years.
The payout formula
Payment = Premium × i ÷ (1 − (1 + i)−n)
where Premium is the lump sum paid in, i is the periodic interest rate the insurer credits, and n is the total number of payments over the payout period. It is exactly the amortization formula used to size a loan repayment — here it tells you the income a fixed pot can sustain rather than the cost of repaying a debt.
Worked example
Take a retiree who hands an insurer a $250,000 premium for a 20-year period-certain annuity crediting 4% a year. Here is what that lump sum buys:
| Step | Amount |
|---|---|
| Premium (lump sum) | $250,000 |
| Credited rate and payout period240 level monthly payments until the balance reaches zero | 4% · 20 yrs |
| Interest credited over the payoutearned on the shrinking balance while the insurer still holds it | $113,588 |
| Total paid back to youthe premium plus all the interest credited | $363,588 |
| = Monthly incomea level payment every month for 20 years | $1,514.95 |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then change the premium, rate, or term to match a real quote.
Types of annuity payout, and their trade-offs
Not all annuities pay out the same way, and the differences matter. Aperiod-certain annuity — the kind this calculator models — pays a fixed income for a set number of years and then stops, whether or not you are still alive. A life annuity instead pays for as long as you live: it guards against outliving your money, but the income stops at death, even if that comes early. Alife-with-period-certain contract sits between the two, paying for life while guaranteeing a minimum number of years to a beneficiary. Payouts can also be immediate, starting right after the premium is paid, or deferred, beginning years later after a build-up phase.
The appeal of any annuity is the same: guaranteed, predictable income and protection against market risk — and, for life annuities, against the longevity risk of outliving your savings. The cost of that certainty is real, though. The money is largely locked up, with little or no access to the principal once the contract begins. There are fees, the income rests on the insurer's credit standing, and a fixed payment is steadily eroded by inflation unless the contract carries a cost-of-living rider.
It is worth being clear about how this differs from simply drawing down your own portfolio. An annuity transfers the investment and longevity risk to an insurer — for a price, since the insurer keeps any returns above the rate it credits you. Self-managed withdrawals keep you in control of the capital and let you keep the market upside, but you carry the risk yourself. To model that alternative, see ourretirement withdrawal calculator. If you are weighing whether to take a pension as a lump sum or an income, the pension lump-sum calculatorframes the same decision, and ourpresent value calculatorhelps you compare a stream of future payments against a sum today.
Frequently asked questions
What is an annuity payout?
An annuity payout is the stream of regular income an insurer pays you in exchange for a lump-sum premium. You hand over a sum of money today and, in return, the insurer sends you a fixed amount each month for either a set number of years or for the rest of your life. This calculator models the period-certain version: a level monthly income paid out over a fixed payout period, after which the contract ends.
How is the monthly annuity payment calculated?
A fixed annuity payout uses the same maths as a loan amortization, run in reverse. Instead of you borrowing money and repaying it with interest, the insurer holds your premium, credits interest on the shrinking balance, and pays it back to you in equal instalments until the balance reaches zero. The size of each payment depends on three things: the premium, the interest rate the insurer credits, and the length of the payout period. A larger premium or a higher rate raises the payment; stretching the payout over more years lowers it.
What's the difference between a period-certain and a lifetime annuity?
A period-certain annuity pays for a fixed term, such as ten or twenty years, and stops at the end of that term whether you are alive or not. A lifetime annuity instead pays for as long as you live, which protects you from outliving your money but stops entirely when you die. Lifetime payouts therefore guard against longevity risk, while period-certain payouts give you a predictable end date and let any remaining payments pass to a beneficiary. A life-with-period-certain contract blends the two, paying for life but guaranteeing a minimum number of years.
Is annuity income guaranteed?
The payments are contractually guaranteed by the insurer, which is what makes annuity income predictable, but that guarantee is only as strong as the insurer behind it. Your income depends on the company remaining solvent, so the insurer carries credit risk that a market portfolio does not. Fixed payouts are also guaranteed in nominal terms only: unless the contract includes a cost-of-living rider, inflation steadily erodes what the same payment buys over a long payout period.
What are the downsides of an annuity?
The main trade-off is flexibility. Once you commit a lump sum, the money is largely locked up, with little or no access to the principal if your circumstances change. Annuities also carry fees, expose you to the insurer credit risk, and, for fixed contracts, leave a level payment to be eroded by inflation. You also give up market upside, because the insurer keeps any investment returns above the rate it credits to you. In short, you are buying certainty by surrendering control and potential growth.
Disclaimer: This calculator is foreducation and illustration only. It models a period-certain payout using a single fixed rate and assumes level payments; real annuity contracts vary in their terms, fees, and guarantees, and life annuities depend on mortality assumptions this tool does not capture. The figures are not quotes for any specific product. Nothing here is investment, tax, insurance, or financial advice.