Immediate Annuity Calculator

What this calculator does

Saving calculators all point one way: up. This one points the other way. It deals with the stage where you stop building a pot and start living off it, taking regular payments out of a sum while whatever remains keeps earning, until the money is spent.

That is the harder half of the problem, and it is the half with the sharper consequences, since running out of money at 80 is a different kind of mistake from saving too little at 30. So instead of one answer, this tool lets you choose which part of the puzzle you are missing and solves for that.

The five questions it can answer

Four things define a drawdown plan: the pot you start with, the payment you take, how long the payments last, and the return the remaining balance earns. Know any three and the fourth is fixed. The dropdown at the top is really asking which one you want to solve for.

• How much can I withdraw. You have the pot and a target duration. It finds the payment that empties it exactly on schedule. This is the retirement-income question.
• How much money should I invest. You know the income you need and for how long. It finds the lump sum required to fund it. This is the planning question, the one to ask before you retire.
• How long can I withdraw for. You have a pot and an income you cannot cut. It finds how long the money lasts. This is the survival question.
• What rate of return is needed. The pot, the income, and the duration are all fixed, and it works back to the return that would make them fit. Read this one as an indication rather than a precise figure, and confirm it by feeding the rate into the first mode to check the payment lands where you expect. Either way it is a useful reality check: if the return required is higher than anything safe pays, it is the plan that needs changing, not the investments.
• How much money will remain. You draw a set income for a set time from a set pot. It finds what is left at the end, which can be a healthy balance or nothing.

Notice that the first four all end at zero by design. They assume the pot is fully spent. Only the last one lets you finish with something left over, so that is the mode to use if you want to preserve capital rather than exhaust it.

How to use it

1. Choose what you want to know. The inputs change to match your choice, asking only for the three figures needed.
2. Payment frequency. How often you take money out, from yearly down to daily. This also sets how often the return compounds.
3. Timing of withdrawals. Beginning or end of each period. It matters, as the section below shows.
4. Start date. Used to date your final withdrawal, so you can see when the plan runs out in real calendar terms.
5. The remaining fields. Some combination of amount, payment, years, and rate, depending on your question.

One important difference from most future value tools: the rate here is the annual expected return, not a per-period rate. The calculator divides it by your chosen frequency itself, so entering 6 with monthly payments means 6 percent a year, applied as 0.5 percent a month. Do not pre-divide it.

A worked example you can check

Say you have Rs 5,000,000, you want monthly income for 20 years, and you expect a 6 percent annual return on the balance, taking each payment at the end of the month.

• Number of withdrawals: 20 × 12 = 240
• Rate per month: 6 ÷ 12 = 0.5 percent
• Monthly withdrawal: Rs 35,821.55
• Total withdrawn over 20 years: Rs 8,597,172.70
• Of which growth on the balance provided: Rs 3,597,172.70
• Final balance: Rs 0

Here is what makes drawdown different from simply dividing the pot by the months. Rs 5,000,000 split over 240 months without any growth would give Rs 20,833 a month. Because the untouched balance keeps earning while you spend the rest, the income is Rs 35,821.55 instead, and you end up withdrawing Rs 8.6 million from a Rs 5 million pot. The interest earned along the way funded well over a third of your income. That is the reward for leaving the remainder invested rather than parking it under the bed.

Why taking the money at the start lowers the payment

The timing dropdown looks minor and is not. Switch the example above from end-of-month withdrawals to beginning-of-month, and the sustainable income drops from Rs 35,821.55 to Rs 35,643.34.

The logic runs opposite to the way timing works when you are saving. There, paying in earlier is good, because your money gets longer to grow. Here you are taking money out, and taking it out earlier means it leaves the pot sooner and stops earning sooner. Every withdrawal removed at the top of the month is a month of growth you have given up on that amount. Over 240 withdrawals it adds up, so the pot can only support a slightly smaller cheque.

The gap is precisely one period's interest: the beginning-of-period payment is the end-of-period payment divided by one plus the monthly rate. It is not a large difference in any single month, but it is the right way round, and if you are pricing a plan down to the last rupee it is worth setting this dropdown to match how you will actually take the money.

When the money never runs out

Ask "how long can I withdraw for" with a modest enough payment and the calculator will refuse to give you a number. That is not a fault, and the answer it is struggling to express is a good one: forever.

There is a threshold where a pot stops depleting. If your withdrawal is no bigger than the interest the balance earns in that period, you are living on the growth alone and never touching the capital, so the balance never falls and there is no date on which it empties. Rs 5,000,000 at 6 percent a year earns Rs 25,000 in the first month. Withdraw Rs 25,000 a month or less and the pot is self-sustaining. Withdraw Rs 25,001 and it will run down, though it will take a very long time. Ask for the duration in the first case and the mathematics has no finite answer to give, so the tool reports that it cannot compute one.

This is genuinely useful to know rather than a quirk to work around, because that threshold, the income your capital throws off without shrinking, is one of the most important numbers in retirement planning. Below it you are living on the harvest. Above it you are eating the seed, and the only question left is how many years the seed lasts. Real plans usually have to sit above the line, since living on interest alone requires a very large pot, but knowing where your own line falls tells you how fast you are consuming capital.

What this models, and what an insurance annuity is

Worth being precise about, because the name is shared by two different things. This calculator models a pot of money you keep and control, invested at a rate you assume, paid out to yourself over a term you choose. It is a drawdown plan.

An immediate annuity in the product sense is something else: a contract with an insurance company. You hand over a lump sum and, in exchange, the insurer pays you an income, typically guaranteed for the rest of your life however long that turns out to be. Because the promise is tied to a lifetime rather than a fixed term, the payment depends heavily on your age when you buy it, the decision to convert is generally irreversible, and once income begins you usually cannot get the capital back. The insurer, not you, carries the risk of you living a very long time.

The differences that matter for reading your result: this tool runs for the number of years you type in, not for as long as you live, so if you outlive the term the payments stop; the rate is your assumption rather than a guarantee, so a bad run of returns changes the outcome; and the money stays yours throughout, meaning anything left over is still in your estate. That makes the tool well suited to planning a self-managed drawdown, comparing it against a quoted annuity, or working out how much capital an income target really needs. For an actual insurance contract, only a quote from the insurer will tell you the real number, and for a decision this size and this permanent, it is worth taking advice before committing.

Questions people ask

Do I enter the annual rate or the monthly one?

The annual rate. The calculator divides it by your payment frequency itself, so with monthly payments you enter 6 for 6 percent a year, not 0.5.

Why does it say it cannot calculate how long the money lasts?

Usually because your withdrawal is smaller than the interest the balance earns, so the pot never empties and there is no finite duration. Raise the withdrawal above that threshold and a number appears.

Should I choose beginning or end of period?

Whichever matches how you will actually take the money. Beginning-of-period withdrawals leave the pot sooner, so the sustainable payment is slightly lower than for end-of-period ones.

Is this the income an insurance company would pay me?

No. This models a self-managed drawdown over a term you choose, at a rate you assume. An insurance annuity pays a guaranteed income based on your age and life expectancy, and only a quote will give you that figure.

References

The underlying calculation is the present value of an annuity, the standard method for valuing a stream of equal periodic payments and for solving for the payment, term, or rate implied by a given sum, as set out in OpenStax's finance text, including the treatment of payments made at the beginning rather than the end of each period. The description of an immediate annuity as an insurance contract exchanging a lump sum for income generally guaranteed for life follows FINRA's investor education material.

1. FINRA, Immediate Annuities: Money Now and for the Rest of Your Life. https://www.finra.org/investors/insights/immediate-annuities-money-now-and-rest-your-life
2. OpenStax, Principles of Finance, 8.2 Annuities. https://openstax.org/books/principles-finance/pages/8-2-annuities