Last updated: 2026-05-19

The annuity payout

An annuity payout is a series of equal periodic payments made from an interest-bearing lump sum over a fixed period, at the end of which the balance reaches exactly zero. The annuity payment calculator computes the size of each payment: enter the principal (the lump sum today), the annual interest rate the fund earns, the number of years payments should last, and the payment frequency. The result is the largest fixed withdrawal that exhausts the balance precisely at the end of the horizon — neither too large (running out early) nor too small (leaving money unspent).

This setup describes a pension drawdown, a retirement-savings decumulation plan, or the payout phase of an immediate annuity product.

Annuity payout vs. loan payment: same formula, opposite perspective

The annuity payment formula is mathematically identical to the standard loan payment (PMT) formula used by every mortgage and auto-loan calculator (see the Loan Payment Calculator for the borrower's perspective). The difference is viewpoint:

Because the formula is the same, the calculation also runs in reverse: a target monthly payment can be divided by the CRF to find the lump sum required to fund it. When a lump-sum pension offer is compared against lifetime monthly payments, the CRF is the ratio that links the two.

Annuity payout vs. sinking fund (accumulation)

A sinking fund calculator answers the accumulation question: how much must be set aside each period to reach a target lump sum? That is the inverse of a payout annuity — the periodic payment goes in rather than coming out. The formulas are related but not identical, because a sinking fund computes a future value target rather than depleting a present value.

The Compound Interest Calculator and Future Value Calculator calculators estimate how large a nest egg a given savings plan will build. Once that target lump sum is known, this calculator gives the payment it will support.

How it's calculated

The calculation is built on the capital recovery factor (CRF):

where $i$ is the interest rate per period ($i = r / f$, the annual rate divided by payments per year) and $n$ is the total number of periods ($n = \text{years} \times f$). Multiplying the principal by the CRF gives the payment per period:

The intuition: money left in the fund continues earning interest as the balance is drawn down. The CRF is always larger than $1/n$ (equal slices of principal) — the difference is the interest that subsidises each payment. The higher the rate or the longer the horizon, the larger the interest subsidy and the larger each payment relative to a zero-interest plan.

The zero-interest boundary

When the annual rate is exactly 0 %, no return accrues on the remaining balance. The payment reduces to equal principal slices:

This is the minimum possible payment for a given principal and horizon — any positive rate adds an interest subsidy that raises the sustainable withdrawal above this floor.

Worked example

Scenario: $487,500 saved at retirement, expected 3.8 % annual return (conservative balanced-fund assumption), monthly payments desired for 25 years.

• $i = 0.038 / 12 = 0.003167$ per month
• $n = 25 \times 12 = 300$ periods
• $(1+i)^n = (1.003167)^{300} \approx 2.5818$
• $\text{CRF} \approx 0.003167 \times 2.5818 / 1.5818 \approx 0.005169$
• $\text{PMT} = 487{,}500 \times 0.005169 \approx$ $2{,}520

So $487,500 at 3.8 % supports about $2,520/month for 25 years — $895 more per month than simply dividing the principal by 300 periods ($1,625/month), purely because the untouched portion keeps earning interest.

How interest rate affects the sustainable withdrawal

At a 4 % rate on $500,000 over 20 years, the monthly payment is about $3,030. Here is how the payment changes with rate, holding principal and horizon fixed:

Higher rates produce a larger monthly income and much more total payout — at 8 %, the same $500,000 pays out over a million dollars over 20 years because the balance earns significantly more in interest.

What this calculator does not model

• Inflation. A $3,000 monthly payment has lower purchasing power in year 20 than in year 1. The Present Value Calculator converts nominal payments to today's dollars for an inflation-adjusted view.
• Variable returns. The formula assumes a constant rate. Real investment returns fluctuate. A portfolio that earns an average of 5 % may run short if returns are poor early in retirement (sequence-of-returns risk).
• Taxes. Withdrawals from pre-tax accounts (401(k), IRA) are taxable income, which reduces the spendable amount below the gross payment.
• Fees. Fund management fees reduce the net return. A 1 % annual fee on a 5 % gross return leaves an effective 4 % rate for the calculation.