Annuity Calculator

What an annuity calculator actually computes

Strip away the insurance marketing and an annuity is a mortgage running backwards. With a mortgage, a bank hands you a lump sum and you pay it back in level monthly instalments while interest accrues on the shrinking balance. With an annuitised drawdown, you hold the lump sum, it earns a return, and you pay yourself level monthly instalments until the balance hits zero. Both use the same amortisation equation: PMT = P x r / (1 - (1 + r)^-n), where P is the principal, r is the monthly rate (annual return divided by 12) and n is the number of monthly payments.

That single equation answers three different retirement questions depending on which variable you leave blank, which is why the calculator starts by asking what you want to find rather than dumping every field on screen at once.

Mode 1 — monthly payout from a principal

Take a 500,000 pot, a 5% annual return and a 25-year payout period. The monthly rate is 0.05 / 12 = 0.0041667 and n is 25 x 12 = 300 payments. Running the formula gives 2,922.95 a month. Over the full period you withdraw 876,885, of which 376,885 is interest earned while the balance was still working. That last figure is the point of the exercise: the pot pays out 75% more than it started with, purely because the money left in the account keeps earning while you spend the rest.

Note how sensitive the answer is to the return. At 0% the same pot only supports 1,666.67 a month — you are simply dividing 500,000 by 300. Every percentage point of return is worth real monthly income, and the calculator handles a 0% entry cleanly for anyone who wants the pessimistic floor.

Mode 2 — how long will my money last?

Flip the unknown. Same 500,000 at 5%, but you want 3,000 a month. Rearranged, n = -ln(1 - P x r / PMT) / ln(1 + r), which returns 285 months, or 23 years and 9 months. You withdraw 855,426 in total. Ask for 2,000 a month instead and something different happens: the monthly interest on 500,000 at 5% is 2,083.33, so a 2,000 withdrawal never touches the capital. The calculator says so explicitly rather than printing an error — withdrawals below the growth rate mean perpetual income, not a depletion date.

That threshold is the most useful number on the page for anyone planning a retirement they hope to leave intact. Principal x annual return / 12 is the monthly income your pot can pay forever on paper. Anything above it starts eating capital; the further above it you go, the faster the depletion date arrives.

Mode 3 — principal needed for a target payment

Now you know the lifestyle and want the price tag. To draw 3,000 a month for 25 years at 5%, you need 513,180 up front. Raise the horizon to 30 years and the requirement climbs; drop the assumed return to 3% and it climbs a lot more. This is the mode to use when you are setting a savings target rather than spending an existing pot.

The inflation trick: enter a real return

Every number above is nominal. A level 2,922 a month buys noticeably less in year 25 than in year 1 — at 3% inflation, about half as much. The fix takes one keystroke: enter a real return instead of a nominal one. If you expect 5% growth in a 3% inflation environment, type 2%. The payout drops to roughly 2,119 a month, but that figure holds its purchasing power for the entire 25 years, and every result on the page is then denominated in today's money. Most US and UK retirement planners quote sustainable withdrawals this way for exactly that reason.

DIY drawdown versus a SPIA

A single-premium immediate annuity from an insurer solves a different problem. You surrender the lump sum permanently, and in return the insurer guarantees income for life however long you live — the longevity risk moves off your balance sheet. That guarantee is funded by mortality credits (money from annuitants who die early), and it is priced with commissions, admin fees and a profit margin baked in. The trade is real income security for lost flexibility, lost inheritance and, usually, a lower headline payout than this calculator shows.

The honest way to use the two together is as a benchmark. Compute the do-it-yourself payout here, then get quotes. If a SPIA pays close to your drawdown figure, the insurer is effectively giving you longevity insurance for free. If it pays far less, you are paying for that guarantee, and you can decide whether it is worth it.

Where this model stops

It assumes one fixed return for every month of the plan, which no real portfolio delivers. Sequence-of-returns risk — a bad first few years while you are withdrawing — can empty a pot years before the maths says it should, even when the long-run average is exactly what you assumed. Taxes are excluded, and drawdown from a traditional IRA or a UK pension is taxable income. Fund fees, platform charges, required minimum distributions after 73 in the US, and state pension income that reduces what you need to withdraw are all outside the model. Treat the output as the arithmetic baseline that any real plan has to beat, not as a schedule to live by.