Turning a Balance Into Income
The payout phase answers one of two questions: how much a balance pays for a fixed number of years, or how long a chosen payment lasts. Both use the same annuity formula that drives loan payments, run in the opposite direction:
Payment = Balance × i / (1 − (1 + i)−n)
where i is the monthly return and n the number of months. The remaining balance keeps earning while it is drawn down, which is why $500,000 over 25 years pays considerably more than $500,000 ÷ 300.
Fixed Period Against Lifetime
A fixed-period payout runs for a set number of years and stops, whether or not you are still alive. A life annuity pays until death, however long that is. The insurer can pay more under a life contract than a portfolio safely can, because it pools longevity across many buyers — the money of those who die early funds those who live long.
The cost of that guarantee is the residual: a life annuity typically leaves nothing to heirs unless you buy a period-certain or refund rider, each of which lowers the payment.
The Return Assumption Does the Heavy Lifting
Small changes in the assumed return move the payment substantially over long horizons, which is why the calculator includes a comparison table across rates. Assuming 6% and receiving 3% does not simply halve the income — it exhausts the balance years early.
Inflation Halves a Flat Payment
A level $2,600 a month is $2,600 forever in nominal terms and roughly $1,400 in purchasing power after 25 years at 2.5% inflation. Options that address this — an inflation-adjusted annuity, or drawing less early — both reduce the starting payment, typically by 25–30%. There is no way to obtain inflation protection without paying for it up front.
Tax on Payments
For a qualified annuity funded with pre-tax money, the whole payment is ordinary income. For a non-qualified annuity funded with after-tax money, each payment is split between a tax-free return of principal and taxable earnings, using an exclusion ratio set at the start. Once the principal is fully returned, the entire payment becomes taxable.
Frequently Asked Questions
How much does a $500,000 annuity pay per month?
Over a fixed 25 years at 4%, roughly $2,600 a month. As a lifetime annuity for a 65-year-old, current quotes are broadly similar, though they vary with rates and the options selected.
What is a safe withdrawal rate?
The commonly cited figure is 4% of the starting balance, adjusted annually for inflation, which historically survived 30 years. A fixed-period annuity is a different arrangement: it deliberately runs the balance to zero, so its payment rate is higher.
Can I change the payment once it starts?
Generally no. Annuitization is irreversible on most contracts, which is the central drawback. Systematic withdrawals from an ordinary investment account keep flexibility but provide no lifetime guarantee.