An annuity is a contract that turns a lump sum into a stream of monthly checks. This calculator prices the mechanics honestly: what a premium pays at a stated fixed rate over a chosen term, how much of each payment is your own money coming back, the income level that never touches principal, and why an insurer's lifetime quote sits above all of it.
An annuity has two halves: the accumulation phase where money grows, and the payout phase where it is spent down. This page prices the payout half for a fixed annuity with a period-certain design, meaning payments run for a term you choose and continue to your beneficiaries if you die within it. The math is the same as a mortgage run in reverse: you are the lender, the insurer is the borrower, and the monthly check combines principal repayment with interest on the remaining balance.
What it does not price is the straight life annuity, the version where payments run until death with no term guarantee. That product cannot be priced from an interest rate alone, because part of its funding comes from mortality credits: the forfeited balances of pool members who die early. A lifetime quote from an insurer will therefore beat this calculator's term-certain payment at the same premium, and the FAQ explains how to judge whether the extra income is worth giving up the term guarantee.
Variables in plain terms. P is the premium handed over on day one. The rate i is the fixed annual crediting rate divided by 12, which is what the insurer credits monthly on the unspent balance during the payout. The term n converts your years into months. The payment formula is the standard present-value annuity equation solved for the payment: it finds the check size whose discounted stream exactly exhausts the premium plus interest at the end of the term. The interest-only floor is the payment you could take forever while spending only earnings, leaving the principal intact as a bequest; the gap between the floor and the term-certain payment is the price of actually spending the principal down.
Hand a $200,000 premium to a fixed annuity crediting 4.5 percent, paid out over 20 years. The monthly check is $1,265.30, or $15,183.59 a year. Over 240 payments you receive $303,671.70, of which $103,671.70 is interest, about 34.1 percent of every dollar collected. The interest-only floor at the same numbers is $750.00 a month: take that forever and the $200,000 stays whole. Choosing the 20-year payout instead buys an extra $515.30 a month at the cost of spending the principal to zero by month 240.
| Result at the defaults | Amount |
|---|---|
| Monthly payment (20-year term certain) | $1,265.30 |
| Annual payment | $15,183.60 |
| Total received over 240 payments | $303,671.70 |
| Interest component of the total | $103,671.70 |
| Interest-only floor (principal untouched) | $750.00 |
| Term-certain advantage over the floor | $515.30 |
The term is the lever with the most leverage. Shorten the payout and each check climbs, because the same premium is spread over fewer months; stretch it and the payment falls toward the interest-only floor. At the default premium and rate, the progression looks like this.
| Payout term | Monthly payment | Total received |
|---|---|---|
| 10 years | $2,072.77 | $248,732.18 |
| 15 years | $1,529.99 | $275,397.58 |
| 20 years | $1,265.30 | $303,671.70 |
| 25 years | $1,111.66 | $333,499.49 |
| 30 years | $1,013.37 | $364,813.42 |
Notice what happens at the long end: stretching from 25 to 30 years adds $31,313.93 of total payout but cuts the monthly check by $98.29, and each further extension buys less income at the cost of more years you might not spend. There is also a slower leak the table hides. A fixed nominal payment erodes with inflation: at 3 percent, the $1,265.30 check buys only about $700.55 of today's goods by the final year. The inflation calculator prices that decay for any term and rate you plug in.
Run an insurer quote for the same $200,000 and the numbers move up. Surveys by LifeAnnuities.us as of October 1, 2026 put the best payout among eight A-rated carriers at $693 a month per $100,000 for a 65-year-old man with a 5-year period certain, which is about $1,386 a month on $200,000, an annualized payout rate of 8.3 percent. A woman the same age is quoted about $658 per $100,000, and a same-age couple with a 100 percent survivor benefit about $608. Carrier spread is real: at age 65 the surveyed quotes ran from $573 to $693 per $100,000, so the same premium can pay 17 percent less depending on the carrier you pick.
The insurer can pay above this calculator's term-certain math because of mortality credits. Many buyers of a life annuity die earlier than the statistical average, and their unspent balances fund the checks of those who live longer. The catch is the guarantee you give up: on a life-only contract, die after twelve payments and the remaining balance belongs to the insurer. Period-certain and cash-refund riders buy that risk back for a smaller check, typically a few percent at 65. And a warning that applies to every annuity pitch: the 8.3 percent figure is a payout rate, not a return. Most of each early payment is your own principal returning, and the true internal rate of return depends on how long you live, which nobody knows at purchase.
Taxation depends on the money that funded the contract. A non-qualified annuity bought with after-tax savings splits each payment through the exclusion ratio: the premium share is a tax-free return of principal, the interest share is ordinary income. At the defaults, $200,000 of premium against $303,671.70 of expected payouts sets the exclusion ratio at about 65.9 percent, so roughly $432 of each monthly check starts out untaxed; after the premium is fully returned, the rest becomes fully taxable. An annuity bought inside an IRA or 401(k) with pre-tax money gets no such split: every dollar is ordinary income when paid.
The fine print carries its own costs. Deferred annuities charge surrender charges on early withdrawals, often starting near 7 percent and stepping down to zero over six to eight years, which is why an annuity should only hold money you will not need back in a hurry. Your payments are a claim on a single insurer, partially backstopped by state guaranty associations whose annuity protection is commonly capped around $250,000 in present value; a larger premium is safer split across two carriers. Finally, sizing: the standard guidance from industry groups such as annuity.com's SPIA guide is to annuitize only enough to close the gap between guaranteed income and essential expenses, commonly 25 to 40 percent of liquid retirement assets, leaving the rest invested. The retirement withdrawal calculator models the portfolio side of that split, and the compound interest calculator shows what the same premium earns if it never gets annuitized at all.
At this calculator's defaults, a $200,000 premium at a 4.5 percent fixed rate paid out over 20 years produces $1,265.30 a month, $303,671.70 in total, of which $103,671.70 is interest. An insurer lifetime quote pays more: the best rate among eight A-rated carriers surveyed by LifeAnnuities.us on October 1, 2026 was $693 a month per $100,000 for a 65-year-old man with a 5-year period certain, about $1,386 a month on $200,000. The gap is mortality credits, which this term-certain math does not include.
Because a life annuity adds mortality credits. The insurer pools hundreds of buyers, and the money left by those who die earlier than expected funds the payments of those who live longer. This calculator can only spread one premium over a term you choose, so it behaves like a bond ladder and cannot offer that subsidy. The trade runs both ways: die early on a life-only contract and the remaining balance belongs to the insurer, which is why many buyers add a period certain or cash-refund feature for a modestly smaller check.
No, and confusing the two is the most common annuity mistake. A $693 monthly payment per $100,000 is a payout rate of about 8.3 percent a year, but in the early years most of each check is simply your own principal coming back. If you died after twelve payments on a life-only contract, the insurer would keep the $91,684 you never received. The internal rate of return of a life annuity is unknowable when you buy it, because it depends on how long you live. The honest comparison is guaranteed income you cannot outlive versus interest you could outlive, which are different products solving different problems.
For a non-qualified annuity bought with after-tax money, each payment is split by the exclusion ratio: the portion representing your original premium is a tax-free return of principal, and the interest portion is taxed as ordinary income. At the calculator defaults, $200,000 of a $303,671.70 total payout makes the exclusion ratio about 65.9 percent, so about $833 of the $1,265.30 monthly payment starts out tax-free while the remaining $432 is ordinary income; once the full premium has been returned, later payments become fully taxable. Annuities bought with pre-tax money, from an IRA or 401(k), have no exclusion ratio: every dollar of every payment is ordinary income.
Enough to close your income gap, and generally no more. The standard framework: add up guaranteed lifetime income such as Social Security and any pension, list the essential expenses you cannot cut, and annuitize only what is needed to bridge the shortfall. Financial professionals commonly suggest keeping annuities to roughly 25 to 40 percent of liquid retirement assets, so the rest stays invested for growth, inflation protection, and emergencies. Run the floor first with the emergency fund calculator, then price the gap in monthly dollars before shopping quotes.
Three ways, none of them market risk in the usual sense. First, insurer solvency: your payments are a claim on one company, partially backstopped by state guaranty associations, which commonly cap annuity protection around $250,000 in present value per insurer, so large premiums are safer spread across two carriers. Second, liquidity: most deferred annuities charge surrender charges, often 7 percent falling to zero over six to eight years, for early withdrawals above a free amount. Third, inflation: a fixed $1,265.30 payment buys only about $700.55 of today's dollars after 20 years at 3 percent inflation, which is the quiet cost this calculator's nominal math does not show.