How is an annuity payout calculated?
The payout uses the amortization formula: PMT = PV × i / (1 − (1+i)⁻ⁿ), where PV is the starting balance, i the periodic interest rate, and n the number of payouts. For example, $500,000 at 5% paid monthly over 25 years yields about $2,923 per month — $876,900 in total, of which $376,900 is interest earned during the payout phase.
How long will my money last in retirement?
It depends on the withdrawal amount relative to investment returns. If your withdrawal is no more than the interest earned each period, the balance never declines. Withdrawing more draws down principal: $500,000 earning 5% supports $3,000/month for about 22 years, but $4,000/month for only 14.5 years. This calculator solves the exact duration for any combination.
What is the 4% rule?
A common retirement guideline: withdraw 4% of your portfolio in the first year, then adjust for inflation annually — historically this sustained a 30-year retirement in most US market scenarios. On $500,000 that is $20,000/year (~$1,667/month). Critics note that low-yield environments, sequence-of-returns risk, and longer lifespans may argue for 3–3.5% instead; flexibility in spending greatly improves success rates.
What payout options do annuities offer?
Common options: life annuity (payments for life, ceasing at death), life with period certain (guaranteed for a minimum term even if you die earlier), joint and survivor (continues for a spouse), and fixed period (payments for a set number of years, as modelled here). Longer guarantees and survivor benefits reduce the periodic payment amount in exchange for security.
What happens to the money if I die early?
It depends entirely on the option chosen at purchase, and this is the decision people most often regret. A life-only annuity pays the highest income and stops at death, with nothing to the estate — which can mean a poor return if death comes soon after purchase. A period-certain option guarantees payments for a minimum number of years, and a joint-life option continues to a spouse, both at the cost of a lower income. Once bought, an annuity is generally irreversible, so the trade-off is worth taking advice on.
Will inflation erode a fixed payout?
Substantially, over a retirement that may last decades. A level annuity pays the same cash amount every year, so at 3% inflation its purchasing power roughly halves over 24 years — the income that felt comfortable at 65 may feel thin at 85, when care costs often rise. Inflation-linked annuities exist and start at a noticeably lower income in exchange for rising later. Neither choice is obviously right, but a level payout should be assessed on what it will buy in twenty years, not only today.