How To Calculate What Your Annuity Will Pay You Each Month

What determines your annuity payment amount

Your annuity payment depends on four concrete things: how much money you put in, your age when payments start, how long you expect to live (your life expectancy), and the interest rate the insurance company uses to calculate payouts. The insurance company runs these numbers through a formula to arrive at a monthly or annual payment amount. Different companies may calculate slightly different payments from the same starting amount because they use different interest rate assumptions and mortality tables.

If you bought a deferred annuity (one where you invested money years ago and are now starting to take payments), the calculation also includes how much your money grew while it sat invested. If you bought an when ready annuity (one where you handed over a lump sum and payments started right away), the calculation is simpler because there is no growth period to account for.

Key Takeaways

• Your payment amount is calculated using your age, the amount you invested, the insurance company's interest rate assumption, and life expectancy tables specific to your age and gender.
• You can request an illustration from the insurance company showing what your monthly payment would be at different ages or with different payout options.
• The same investment amount produces different monthly payments depending on whether you choose a single-life payout (higher monthly amount) or a joint-life payout that continues to a surviving spouse (lower monthly amount).
• Online annuity calculators can give you a rough estimate, but the insurance company's official calculation is the one that matters when you actually start withdrawals.

How insurance companies calculate the payment formula

Insurance companies use actuarial tables — statistical tables based on how long people of your age and gender typically live — to estimate how many years they will be paying you. They also use a discount rate (an interest rate assumption) to figure out what monthly payment today equals the lump sum you gave them. The formula balances these two things: if they assume you will live longer, the monthly payment goes down (spread over more years). If they assume a higher interest rate on their investments, the monthly payment can go up.

The company also factors in its own costs and profit margin. This is why two companies quoting on the same $500,000 investment might offer you $2,100 per month and $2,150 per month — they are using slightly different assumptions about interest rates and mortality.

Single-life versus joint-life payout options and their effect on payment size

A single-life annuity pays you a monthly amount for as long as you live. Once you die, payments stop completely. This option produces the highest monthly payment because the insurance company is only responsible for one person's lifetime.

A joint-life annuity (also called a survivor annuity) continues paying a surviving spouse or beneficiary after you die, usually at the same amount or a reduced percentage like 50 or 75 percent. Because the insurance company may be paying for two lifetimes instead of one, the monthly payment to you is lower — sometimes 10 to 20 percent lower, depending on your spouse's age and the survivor percentage you choose.

Some annuities also offer a period-certain option, which guarantees payments for a set number of years (like 10 or 20 years) even if you die before that period ends. The remaining payments go to your estate or beneficiary. This option also reduces your monthly payment compared to single-life, because the insurance company has a longer may provide payout obligation.

How to request a payment illustration from your insurance company

Contact the insurance company that issued your annuity contract. You will need your policy number, which appears on your contract or any statement the company has sent you. Ask for an annuity illustration or payout illustration — these are standard documents that show what your monthly payment would be under different scenarios.

The illustration should show payment amounts for different start dates (if you have not started yet), different payout options (single-life, joint-life, period-certain), and sometimes different survivor percentages. Some companies provide this by phone; others require you to request it in writing or through their online portal. There is no charge for this illustration.

If you no longer have contact information for the company, check your original contract or any recent statements. If the company has gone out of business, your state's insurance commissioner's office can help you locate the successor company that now manages your contract.

Using online annuity calculators for a rough estimate

Online calculators can give you a ballpark figure for what an annuity payment might be. You enter your age, the amount you invested, and sometimes the payout option, and the calculator returns an estimated monthly payment. These tools are useful for comparing rough numbers across different scenarios or different companies.

However, online calculators use generic interest rate assumptions and mortality tables. Your actual payment from the insurance company will differ because the company uses its own rates and tables. The calculator result might be within 5 to 10 percent of the real number, or it might be further off depending on current interest rates and the calculator's assumptions.

Use an online calculator to understand the general relationship between your age, investment amount, and payment size. Use the insurance company's official illustration to know what you will actually receive.

Why your payment stays the same (or changes) over time

Most fixed annuities pay you the same dollar amount every month for life. The payment does not increase with inflation, so your purchasing power declines over time. This is why some people choose an inflation-adjusted annuity, which starts with a lower payment but increases by a set percentage each year (often 2 or 3 percent). The trade-off is a noticeably smaller starting payment.

A variable annuity payment fluctuates based on the performance of the underlying investments you chose. If those investments gain value, your payment increases. If they lose value, your payment decreases. The insurance company calculates an initial payment amount, but that amount is not may provide to stay the same.

Some annuities include a cost-of-living adjustment (COLA) rider, which automatically increases your payment by a percentage tied to inflation. Adding a COLA rider reduces your starting payment but protects you against inflation over decades of retirement.

What happens if you want to change your payout option before payments start

If you have not yet started taking payments from your annuity, you usually can change your payout option by contacting the insurance company and requesting a new illustration. The company will recalculate your payment under the new option and ask you to sign a form confirming the change. This is free and does not trigger any tax consequences as long as you have not yet taken any money out.

Once payments have started, changing the payout option is much more difficult or impossible, depending on the contract terms. Some companies allow you to stop payments and restart under a different option, but this may have tax consequences. Read your contract or ask the company directly what flexibility you have after payments begin.

Frequently Asked Questions

Can I see what my payment would be if I wait until age 70 instead of 65?

Yes. Request an illustration from the insurance company and ask them to show payment amounts at different start ages. Waiting longer usually means a higher monthly payment because you are older and the company expects to pay you for fewer years. The exact increase depends on the company's mortality tables and interest rate assumptions.

Does my payment change if interest rates go up or down after I buy the annuity?

For a fixed annuity, no — your payment is locked in when you start taking money. For a variable annuity, your payment changes based on how your chosen investments perform, not based on general interest rates. If you have not started payments yet, the payment amount you will receive is calculated using the interest rate assumption in effect on your start date.

What if I think the insurance company calculated my payment wrong?

Request a detailed breakdown of how they calculated the amount. Ask them to show you the interest rate assumption, the mortality table they used, and the payout option you selected. If you believe there is an error, file a complaint with your state's insurance commissioner's office, which can investigate whether the calculation followed the contract terms.

Is there a way to get a higher monthly payment from the same amount of money?

Yes — choose a single-life payout instead of joint-life, or choose a shorter period-certain may provide. You can also wait longer before starting payments, which increases the monthly amount. The trade-off is that you lose survivor benefits or guarantees, or you delay receiving any income.