Annuity Payout
Estimate periodic annuity payments, present value, and future value for immediate or deferred annuities based on payout terms and interest
Formula
PMT = PV × r / [1 - (1+r)^-n]
Calculates equal periodic payments that fully amortize a principal over n periods at interest rate r. For life annuities, insurers use mortality tables.
Worked Examples
Example 1: 20-Year Fixed Period Annuity
Problem:$500,000 premium, 4% annual rate, 20-year payout period. Calculate monthly payment and total received.
Solution:Convert to monthly terms:\nPrincipal (PV) = $500,000\nMonthly rate (r) = 4% ÷ 12 = 0.333%\nPayments (n) = 20 × 12 = 240\n\nPayment formula:\nPMT = PV × r / [1 - (1+r)^-n]\nPMT = $500,000 × 0.00333 / [1 - (1.00333)^-240]\nPMT ≈ $3,029.90/month\n\nTotal received: $3,029.90 × 240 ≈ $727,176\nTotal interest earned: $727,176 - $500,000 ≈ $227,176
Result:$3,030/month | Total received: about $727,176
Example 2: Comparing Payout Periods
Problem:$300,000 annuity at 5% rate. Compare 15-year vs 25-year payout periods.
Solution:15-Year Payout:\nn = 180 months, r = 0.417%/month\nPMT ≈ $2,372.38/month\nTotal ≈ $427,029\nInterest ≈ $127,029\n\n25-Year Payout:\nn = 300 months\nPMT ≈ $1,753.77/month\nTotal ≈ $526,131\nInterest ≈ $226,131\n\nTrade-off: 15-year gives about $619 more per month but about $99,102 less total payout.
Result:15yr: $2,372/mo | 25yr: $1,754/mo (+about $99K total)
Example 3: Immediate Life Annuity Estimate
Problem:65-year-old with $400,000 wants lifetime income. Estimate using typical 5.5% payout rate for age 65.
Solution:Immediate life annuity at age 65:\nTypical payout rate: ~5.5% annually\n\nAnnual income estimate:\n$400,000 × 5.5% = $22,000/year\n\nMonthly income:\n$22,000 ÷ 12 = $1,833/month\n\nIf lives to 85 (20 years):\nTotal received: $22,000 × 20 = $440,000\n\nIf lives to 95 (30 years):\nTotal received: $22,000 × 30 = $660,000\n\nNote: Actual rates vary by insurer, gender, and market conditions. Women typically get 5-10% lower payouts due to longer life expectancy.
Result:~$1,833/month for life | $440K if live to 85
Frequently Asked Questions
What is an annuity?
An annuity is a contract with an insurance company where you pay a lump sum (or series of payments), and in return, they guarantee regular income payments for a set period or for life. It converts your savings into a predictable income stream, transferring longevity risk to the insurer.
What's the difference between ordinary and annuity due?
Ordinary annuity: payments at the END of each period (most common for loans). Annuity due: payments at the BEGINNING of each period (common for rent, insurance premiums). For the same principal and rate, annuity due has slightly lower per-period payments because money is received earlier.
How is annuity payout calculated?
For fixed-period annuities: PMT = PV × r / [1 - (1+r)^-n], where PV = principal, r = periodic rate, n = periods. For lifetime annuities, insurers use mortality tables, interest assumptions, and profit margins. A 65-year-old might get 5-6% payout rate; an 75-year-old might get 7-8% because of shorter life expectancy.
What is a payout rate?
The annual payment as a percentage of the premium. A $500,000 annuity paying $30,000/year has a 6% payout rate. This is NOT the same as investment return - part of each payment is return of your own principal. Payout rates depend on age, gender (women get less due to longer lifespan), interest rates, and annuity type.