How much does an annuity pay per month?
Each $100,000 at 5% pays about $660 a month for 20 years. A longer term or a lower rate cuts the payment. The table works for any amount: for $300,000, multiply by three.
| Years of payments | 3% | 4% | 5% | 6% | 7% |
|---|---|---|---|---|---|
| 10 | $966 | $1,012 | $1,061 | $1,110 | $1,161 |
| 15 | $691 | $740 | $791 | $844 | $899 |
| 20 | $555 | $606 | $660 | $716 | $775 |
| 25 | $474 | $528 | $585 | $644 | $707 |
| 30 | $422 | $477 | $537 | $600 | $665 |
Most of the money you get back is your own. In the first example you'd receive $395,973 in total, and only $145,973 of it is interest. So a payment is not a return. Comparing it to an interest rate on a savings account will mislead you.
The annuity formula, worked through
A level payment uses the standard annuity formula, where P is the lump sum, r is the rate per payment period, and n is the number of payments.
Payment = P × r ÷ (1 − (1 + r)^−n)For $250,000 at 5% over 20 years, r is 0.004167 and n is 240, which gives $1,650. Turn the formula around to find the lump sum for an income you want: P = Payment × (1 − (1 + r)^−n) ÷ r.
Asking how long an annuity will last is the same formula solved for n. Taking $2,000 a month from $250,000 at 5% lasts 14 yrs 9 mos. Payments at the start of each month, called an annuity due, come out slightly lower because the money earns less.
Why this calculator can't tell you a lifetime payout
An insurer sets a lifetime payment using mortality assumptions, fees, and its own costs. Those depend on your age and the contract. No calculator can honestly produce that number without the insurer's pricing, so this one doesn't try. Get a written quote from an insurer, and compare more than one.
What you can do is test a quote. Enter its monthly payment under advanced options, and you'll see the return it implies. Here's an example quote of $1,500 a month on $250,000, which is made up for illustration.
| Payments last | Total received | Annual return |
|---|---|---|
| 10 years | $180,000 | -6.18% |
| 15 years | $270,000 | 1.03% |
| 20 years | $360,000 | 3.89% |
| 25 years | $450,000 | 5.26% |
| 30 years | $540,000 | 6.01% |
| 35 years | $630,000 | 6.44% |
The trade is plain in that table. A lifetime contract pays poorly if you die early and well if you live long. You are buying protection against a long life, and the return depends on a date you can't know.
What inflation does to a level annuity payment
A level payment loses buying power every year. At 2.5% inflation, a $1,650 payment in year 20 buys what $1,032 buys today. Building in a yearly raise fixes that, but you start lower.
| Yearly raise | First payment | Year 20 payment | In today's dollars |
|---|---|---|---|
| 0% | $1,650 | $1,650 | $1,032 |
| 1% | $1,523 | $1,840 | $1,151 |
| 2% | $1,403 | $2,044 | $1,279 |
| 3% | $1,289 | $2,261 | $1,414 |
Treat the raise as a real cost. Whether it's worth it depends on how long you expect to rely on the income. The first-year cut is certain, and the later gain only arrives if you live to collect it.
How much does a deferred annuity grow while you wait?
FINRA calls the time between your first premium and your first income payment the accumulation period. $100,000 at 4%, compounded monthly, reaches $149,083 after 10 years. Adding $500 a month brings it to $222,708.
| Years you wait | Balance at the start | Monthly payout |
|---|---|---|
| 5 | $122,100 | $806 |
| 10 | $149,083 | $984 |
| 15 | $182,030 | $1,201 |
| 20 | $222,258 | $1,467 |
The growth is tax deferred, which is a real benefit in a regular account. FINRA points out that an annuity inside an IRA or 401(k) gives you no additional tax advantage. It also warns that a fixed annuity's rate may change after an initial fixed period, so the rate you're shown may not last for the full wait.
The costs that shrink an annuity without showing on a bill
- Ongoing fees. FINRA lists mortality and expense risk charges and administrative fees, and warns of high commissions. As our own example, a 1.25% yearly charge on $300,000 is $3,750 a year. In this tool, cutting 5% to 3.75% would lower the payment on $250,000 from $1,650 to $1,482.
- Limits on gains. Not every cost is a fee. FINRA says a registered index-linked annuity's buffer or floor often caps your opportunity for gains. Check your contract for any cap and for how its credited rate is set.
- Surrender charges. Taking money out within a set number of years can trigger a charge.
- Taxes and penalties. You pay no tax on gains until you withdraw or take income. Before age 59½, a withdrawal may add a 10% tax penalty.
- The insurer itself. FINRA reminds investors that an annuity is only guaranteed as long as the insurer stays in business, and that no federal agency, including the FDIC and SIPC, guarantees it.
FINRA says a free-look period lets you cancel a new contract without surrender charges. Your state sets its length, generally 10 to 30 days. State insurance commissioners regulate annuities, and FINRA's BrokerCheck shows whether a broker is licensed or has a history of complaints. A fee-only planner or tax professional can review an offer before you sign. To compare with keeping the money yourself, try the retirement withdrawal calculator. For the bigger picture, read how much you need to retire.
Common questions
Can I use this for an annuity for life?
Only as a comparison. It pays a fixed term, so enter the years you want to plan for, then enter a real quote to see its implied return. Lifetime payments need an insurer's quote.
Are annuity payments taxed?
Often in part or in full. IRS Topic 410 says payments from a qualified employer plan are fully taxable if you have no after-tax money in them, and partly taxable if you do. Publication 575 covers the details. This calculator shows amounts before tax.
What is the difference between an immediate and a deferred annuity?
FINRA says an immediate annuity typically starts paying within one month to a year of purchase. With a deferred annuity, the payout phase comes at a future date, so money can accumulate first. Set "Years to wait" to zero for an immediate start.
Does compounding match what my contract does?
Maybe not. This tool compounds once per payment period, so the payout rate compounds monthly on monthly payments. Your contract may state the rate differently, so use its figures to check the result.
Why is my quote different from this estimate?
A quote includes mortality, fees, and the insurer's pricing, and this tool leaves all of that out. It also won't reflect riders, a refund feature, or a guarantee period.
Sources
- Annuities · Financial Industry Regulatory Authority (FINRA)
- Topic no. 410, Pensions and annuities · Internal Revenue Service
- Publication 575: Pension and Annuity Income · Internal Revenue Service