Annuity Payout Calculator: Lifetime Income Sustainability

• Worked example:
  $500,000 premium at age 65 on a 7% Single Life rate is about $2,917/month. 100% Joint Survivor on the same premium often quotes near $2,460. A 3% COLA rider on Single Life typically starts around $2,250 and can pass the flat line in cumulative dollars around years 12–15.
• What this misses:
  Insurer-specific quotes, state guaranty limits, and individual product illustrations. Use this to compare payout structures on the same premium; shop carriers for actual rates before signing anything.
• One thing worth knowing:
  Premium is the lump sum you are converting, not an ongoing balance. Pick payout type first because it moves the monthly number more than a tenth of a point on the rate. Qualified means every dollar is ordinary income; non-qualified uses an exclusion ratio on after-tax money.

• Basic Payout Relationship:
  $$\text{Annual Payout} = \text{Premium} \times \text{Payout Rate}$$

  The payout rate (e.g., 7.0% for a 65-year-old Single Life) is determined by the insurer based on age, gender, payout type, and prevailing interest rates.

• Exclusion Ratio (Non-Qualified):
  $$\text{Exclusion Ratio} = \frac{\text{Premium}}{\text{Monthly Payment} \times 12 \times \text{Life Expectancy}}$$

  Determines the tax-free portion of each payment for after-tax funded annuities. Only the remaining fraction is taxable as ordinary income.

• Break-Even Calculation:
  $$\text{Break-Even Years} = \frac{\text{Premium}}{\text{Annual Payout}}$$

  The point where cumulative payments equal the premium paid.

• Worked Example:
  $500,000 premium, age 65, 7.0% payout rate → $35,000/year ($2,917/month). Break-even: $500,000 ÷ $35,000 = 14.3 years (age 79). With 20-year life expectancy, expected total payments = $700,000. Exclusion ratio = $500,000 ÷ $700,000 = 71.4%, so only 28.6% of each payment ($834/month) is taxable until premium recovery.
• COLA Adjustment:
  With a 3% COLA rider, starting payout is reduced ~25% but grows annually. Year-1 payment: $2,188/month. By year 15: $3,415/month (exceeding the flat payout). Cumulative crossover typically occurs around year 12–15.

Life with period certain

• How it works:
  If you die before the certain period ends, the beneficiary gets the remaining years. Example: 20-year certain at 65; death at 70 leaves 15 years of payments to the beneficiary.
• Typical rates (age 65, 2026):
  10-year certain often 6.8–7.2% (a few percent below Single Life). 20-year certain often 6.4–6.8%. Longer certain periods mean lower monthly income.
• Trade-off:
  You buy continuation for heirs with a lower lifetime check. If you outlive the certain period, you only kept the lifetime income you would have had anyway, at a reduced rate. Term life on the side is sometimes cheaper for pure legacy.

Cost-of-living adjustments

• Starting trade-off:
  3% COLA often cuts the opening payment by 20–25%. On $500,000: flat near $3,000/month, 3% COLA near $2,250/month, with crossover around years 12–15.
• Year 20:
  3% COLA can reach about $4,063/month while the flat line still shows $3,000 (worth about $1,660 in today's dollars at 3% inflation). Cumulative through year 20: COLA ≈ $738,000 vs flat ≈ $720,000; COLA tends ahead if you live 15+ years past purchase.
• COLA vs flat:
  COLA fits longer horizons (often annuitizing at 60–65) when fixed costs rise with inflation and you lack other indexed income. Flat fits shorter horizons (75+), strong pensions or TIPS elsewhere, or when you need the highest first-year number.

Exclusion ratio (non-qualified)

• Exclusion Ratio Formula:
  $$\text{Exclusion Ratio} = \frac{\text{Premium}}{\text{Expected Total Payments}}$$

  Expected payments = Monthly payment × 12 × IRS life expectancy. At 65, IRS uses ~20-year expectancy.

• Example Calculation:
  $500,000 premium, $3,000/month payment, age 65 (20-year expectancy). Expected payments = $3,000 × 12 × 20 = $720,000. Exclusion ratio = $500,000 / $720,000 = 69.4%. Only 30.6% of each payment is taxable ($917/month) until you recover your full premium.
• After Premium Recovery:
  Once you've received $500,000 in total payments (about 14 years at $3,000/month), your premium is fully recovered. After that, 100% of each payment becomes taxable. This is the "crossover point" where taxes increase.
• Qualified Annuities (401k/IRA Funds):
  No exclusion ratio: 100% of every payment is taxable as ordinary income because the premium was never taxed. This is the same treatment as 401k/IRA withdrawals. No special tax advantage, but also no tax disadvantage vs. systematic withdrawals.

When payments equal premium

• Formula:
  $$\text{Break-Even Years} = \frac{\text{Premium}}{\text{Annual Payout}}$$

  At 7% payout rate: $500,000 / $35,000 = 14.3 years. Age 65 + 14 years = break-even at age 79.

• Life expectancy:
  At 65, averages are mid-80s (men near 84, women near 87); for couples, roughly even odds one spouse reaches 92. Many people collect past break-even, but dying at 72 with money left in the contract is a different problem than living to 95 with an empty portfolio.
• Better question:
  Ask whether you can fund fixed spending to 95 without this income stream. If not, break-even math is secondary to removing longevity risk.