How It Works
This calculator determines the fixed periodic payment you can receive from a lump sum (principal) over a specified number of years while the remaining balance continues to earn interest.
Key Formula
Payment Amount = P × [r × (1 + r)^n] / [(1 + r)^n − 1]
Where:
• P = Principal (Starting Amount)
• r = Interest rate per period
• n = Total number of payment periods
Important Concepts
- Fixed Payout Period: You choose how many years the payments will last. The payment amount is calculated accordingly.
- Interest During Payout: Unlike simple withdrawal, the remaining balance continues to earn returns, allowing for higher sustainable payments.
- Depleting to Zero: At the end of the payout period, the balance reaches zero (or very close).
- Longer Period = Smaller Payments: Spreading payments over more years reduces the amount received each period.
Tips
- Consider inflation — a fixed payment loses purchasing power over time.
- Many people use annuities to create a "pension-like" income stream in retirement.
- Compare this with other retirement income sources (Social Security, pensions, 401k withdrawals).