Annuity Payout Calculator — Income From a Lump Sum

The arithmetic of paying a balance down to zero

The payment comes from the standard amortisation formula: PMT = P × i ÷ (1 − (1 + i)^−n), where P is the starting balance, i is the rate per payment period, and n is the total number of payments. A balance of 500,000 earning 5% per year and paid out monthly over 20 years produces 3,299.78 a month. Across the 240 payments that totals 791,946.89 — the original 500,000 plus 291,946.89 of interest earned by the shrinking balance along the way. That interest is the reason the payout comfortably exceeds the simple division of 500,000 ÷ 240 = 2,083.33: money not yet withdrawn keeps working until its turn comes.

What moves the payment most

Three inputs drive the result, and their effects are worth seeing side by side on the same 500,000 balance paid monthly over 20 years. The rate matters substantially: at 4% the payment is 3,029.90, at 5% it is 3,299.78, and at 6% it is 3,582.16 — each percentage point adds roughly 270 to 285 a month on this balance and term. The term trades income for duration: stretching the same balance at 5% from 20 to 25 years lowers the payment to 2,922.95, because each unit of currency has to cover more months. Frequency is the subtle one: the same balance and rate paid annually gives 40,121.29 a year, which is more than twelve times the monthly 3,299.78 (39,597.34), since annual payouts leave the full balance earning for longer between withdrawals.

Fixed-term payouts versus lifetime annuities

This calculator models a period-certain payout: the term is chosen, and the balance is exhausted exactly at its end. Insurance companies also sell lifetime annuities, where payments continue for as long as the holder lives. Those products embed mortality pooling — payments from those who die early fund those who live long — plus the insurer's pricing, guarantees, and fees, none of which appear in a pure amortisation. A lifetime annuity quote for a given lump sum is therefore not comparable to this calculator's output, and quotes vary between insurers, by age, by health, and by the options attached (survivor benefits, inflation linking, guarantee periods). What the fixed-term math does show is the baseline arithmetic any product must improve on to justify its costs.

Payout rate versus withdrawal rate

Retirement planning often frames income as a percentage of the starting balance. The 3,299.78 monthly payment here is 39,597.34 a year — a 7.9% payout rate on 500,000, far above the 4% figure common in safe-withdrawal discussions. The difference is structural: a fixed-term payout spends principal deliberately and reaches zero by design, while a withdrawal-rate strategy tries to preserve the balance against an uncertain lifespan and uncertain returns. The Safe Withdrawal Rate Calculator models the preservation approach, and the Drawdown Calculator answers the inverse question — how long a balance lasts at a chosen spending level. Comparing all three frames the trade-off between income now and money later.

The rate assumption does the heavy lifting

A single rate across a 20-year payout is a strong simplification. Real portfolio returns arrive unevenly, and a payout schedule locked to a fixed payment meets weak early years by selling more units at depressed values — the sequence-of-returns problem that a constant-rate model cannot show. Balances held in fixed-rate products avoid that variability at the cost of lower expected rates; balances held in market portfolios face it in exchange for higher expected growth. Running the calculator at a conservative and an optimistic rate brackets the range of payments a real balance might sustain.

A zero-rate floor

At a 0% rate the formula reduces to simple division: 500,000 over 240 monthly payments is 2,083.33 a month, with no interest component at all. The gap between that floor and the payment at any positive rate is exactly what the return contributes — on this example, about 1,216 of the 3,299.78 monthly payment comes from growth rather than principal.