Convert a lump sum into a monthly income stream over a chosen period. This calculator models a fixed-payment annuity with a configurable assumed return.
Monthly payment
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Total received over period
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Total return on premium
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Turning a pile of money into a paycheck
The deepest fear in retirement is not running out of money on paper, it is not knowing whether you will. A single premium immediate annuity answers that question by trading a lump sum to an insurer in exchange for a fixed monthly check. You give up access to the principal and the chance to invest it yourself, and in return you get a payment that arrives whether the market soars or crashes. This calculator models the period-certain version of that deal, where payments run for a set number of years, and shows you the monthly amount, the total you will collect, and how that total compares to what you handed over.
Under the hood it is the standard annuity-payment formula, the same math a lender uses to amortize a loan, just pointed in the opposite direction. The insurer is effectively lending your money back to you with interest, sized so that the final payment empties the account exactly at the end of the term.
$500,000 turned into 25 years of income
Run the defaults: a $500,000 premium, a 25-year payout, and a 5% assumed annual return, which sits inside the 4% to 6% range immediate annuities have quoted in the higher-rate environment of recent years. The formula spreads the lump sum plus its ongoing interest across 300 monthly payments.
| Input | Value |
|---|---|
| Lump sum premium | $500,000 |
| Payout period | 25 years (300 months) |
| Assumed return | 5% a year (0.4167% monthly) |
| Monthly payment | $2,923 |
| Total received | $876,885 |
| Earnings over the premium | $376,885 (75%) |
The $2,923 monthly works out to about $35,076 a year, and over the full term you collect $876,885, which is $376,885 more than your premium. That extra is the interest the insurer credits on the slowly declining balance. The reason the payment is so much larger than 5% of $500,000 (which would be $25,000 a year as pure interest) is that this structure returns your principal too, eating into the balance month by month until it reaches zero.
Period certain versus lifetime, and the part the model leaves out
This calculator models a fixed term, but the version most retirees actually buy is a life annuity, which pays until you die regardless of how long that is. That is the real product, because it insures against longevity, the risk of living to 100 and outlasting your savings. A life annuity priced on the same $500,000 might pay a similar or slightly different monthly figure depending on your age and gender, but with a fundamentally different promise: the insurer keeps whatever is left if you die early, and keeps paying if you live long. The trade is the loss of any bequest. Many retirees split the difference with a "life with period certain" rider that guarantees payments to your heirs for, say, the first ten years even if you pass away sooner.
How are the payments taxed?
It depends entirely on where the money came from. Fund the annuity from a traditional IRA or 401(k) and every dollar of each payment is ordinary income, because none of it was ever taxed. Fund it with after-tax savings and only the earnings portion of each payment is taxable, with the rest treated as a return of your own principal under what the IRS calls the exclusion ratio, fixed at purchase. That structure can make a non-qualified annuity surprisingly tax-efficient in the early years.
What happens if my insurer fails?
Annuities are backed by the issuing insurance company, not by federal deposit insurance. Your protection comes from your state's guaranty association, which covers annuity benefits up to a per-person limit that varies by state, commonly $250,000 of present value but sometimes higher. The practical takeaway is to buy from a highly rated insurer and, if your premium is large, to consider splitting it across two carriers so you stay inside the guaranty limits.