The basic formula for annuity payments
An annuity payment is calculated by dividing the total amount of money in your annuity by the number of months you expect to receive payments. The insurance company or financial institution holding your annuity uses your age, life expectancy, current interest rates, and the annuity's terms to arrive at a monthly figure.
If you have a fixed annuity — one where the payment amount stays the same every month — the company locks in that number when you start receiving payments. If you have a variable annuity, the payment changes based on how the underlying investments perform. The starting calculation is the same, but the amount you actually receive each month will fluctuate.
The reason insurance companies do this calculation is to may support they can pay you for as long as you live without running out of money or losing money themselves. They are betting on how long you will live; you are betting on living longer than they predict. That tension is what creates the payment amount.
Key Takeaways
- Annuity payments are calculated using your age, the total money in the annuity, how long you are expected to live, and current interest rates.
- Fixed annuities pay the same amount every month; variable annuities change based on investment performance.
- You can request an in-force illustration from your insurance company that shows exactly what your monthly payment would be under different scenarios.
- The payout rate — the percentage of your annuity paid out each year — varies widely depending on your age and the type of annuity you choose.
- Delaying when you start receiving payments increases your monthly amount because the insurance company expects to pay you for fewer years.
What information you need to get a payment estimate
To calculate or understand your annuity payment, gather these documents and facts: the annuity contract itself (or a summary of its terms), your current age, the total amount of money in the annuity account, and the date you plan to start receiving payments.
If you bought the annuity from an insurance company, you should have received a document called a prospectus or product brochure when you purchased it. This document explains how payments are calculated for that specific annuity. If you cannot find it, contact the insurance company directly — they are required to provide this information.
You will also want to know whether your annuity has any riders — add-on features that change how payments work. Common riders include a may provide that payments continue to a beneficiary if you die early, or a cost-of-living adjustment that increases your payment each year. Riders affect the payment amount, so the insurance company must account for them in the calculation.
How age and life expectancy affect your payment
The older you are when you start receiving payments, the higher your monthly amount will be. This is because the insurance company expects to pay you for fewer years. A 75-year-old will receive a larger monthly check than a 65-year-old with the same amount of money in the annuity, because statistically the 75-year-old has fewer years left to live.
Insurance companies use mortality tables — statistical data about how long people of different ages typically live — to make this calculation. These tables are updated regularly and vary slightly between companies. The tables account for your sex as well, since men and women have different average life expectancies.
If you delay starting your annuity payments, your monthly amount increases. Waiting five years to begin payments can increase your monthly check by 20 to 40 percent, depending on your age and the annuity type. This is one reason some people choose to delay annuity payments if they do not need the money when ready.
Interest rates and how they change your payment
When interest rates are high, annuity payments are higher. When interest rates are low, payments are lower. This is because the insurance company invests your annuity money and uses the returns to help fund your payments. Higher interest rates mean the company can earn more on your money, so it can afford to pay you more each month.
Interest rates change constantly, so the payment amount you would receive today is different from the amount you would receive if you started payments next month. If you are considering when to begin receiving payments, interest rate environment matters. During periods of rising rates, delaying payments can result in a noticeably higher monthly amount.
This is one reason why annuity payments vary so much from person to person, even among people of the same age with the same amount of money. Someone who bought an annuity in 2022 when rates were low will receive a smaller payment than someone who bought an identical annuity in 2024 when rates were higher.
Requesting a payment illustration from your insurance company
The most accurate way to find out what your annuity will pay is to ask the insurance company for an in-force illustration. This is a document that shows what your monthly payment would be if you started receiving payments today, or on any future date you specify.
Contact the insurance company that issued your annuity — the name should be on your contract. Tell them you want an in-force illustration. You will need to provide your policy number and confirm your age and the date you want payments to begin. Most companies can provide this within a few business days, either by mail or email.
The illustration will show your monthly payment amount, the total you would receive in a year, and sometimes multiple scenarios (for example, what you would receive if you started payments at age 70 versus age 75). It will also show any fees or charges that reduce your payment. Read this document carefully — it is the most reliable estimate you can get without actually starting the annuity.
The difference between payout rates and actual payments
You may hear the term payout rate, which is the percentage of your annuity paid out each year. A 5 percent payout rate means you receive 5 percent of your annuity balance annually. However, payout rates vary widely — from 3 percent to 8 percent or more — depending on your age, the annuity type, and current interest rates.
A payout rate is useful for comparing different annuities, but it is not the same as your actual payment. If you have a $200,000 annuity with a 5 percent payout rate, you would receive $10,000 per year, or about $833 per month. But if that same annuity has a 4 percent payout rate, you would receive $8,000 per year, or about $667 per month. The difference is significant over time.
Younger people typically receive lower payout rates because the insurance company expects to pay them for many decades. Older people receive higher payout rates because their expected payment period is shorter. This is why a 50-year-old and an 80-year-old with the same amount of money in an annuity will receive very different monthly payments.
What happens if you want to change your payment start date
If you have not yet started receiving annuity payments, you can usually change when you want to begin. Delaying will increase your monthly amount; starting sooner will decrease it. Contact your insurance company and ask about changing your payout start date.
Some annuities have restrictions on when you can start payments, so check your contract. A few annuities require you to start by a certain age (often 85 or 90). Others allow you to delay indefinitely. If your annuity has a free withdrawal period — a window during which you can withdraw money without penalty — that period may affect when you can start annuity payments, so ask about this specifically.
Once you start receiving annuity payments, you usually cannot change the payment amount or frequency. This is why it is important to understand the calculation before you begin. If you think you might want flexibility later, discuss this with the insurance company before you start — some annuities offer options like the ability to take a lump sum withdrawal once per year, which gives you more control.
Frequently Asked Questions
Can I calculate my annuity payment myself without calling the insurance company?
You can estimate it using the payout rate from your contract and multiplying it by your annuity balance, but the insurance company's calculation will be more accurate because it accounts for your specific age, the exact date you want to start, current interest rates, and any riders on your policy. Request an in-force illustration for the real number.
Why is my annuity payment lower than I expected?
Common reasons include: you started payments at a younger age than you initially planned, interest rates have dropped since you purchased the annuity, you have riders that reduce the payment, or fees are being deducted from your payment. Review your in-force illustration to see which factors explore to you.
Does my health affect my annuity payment?
For a standard annuity, no — the insurance company uses age and life expectancy tables, not your individual health. However, some annuities called impaired-life annuities do pay more if you have a serious health condition, because your life expectancy is shorter. Ask your insurance company whether your annuity qualifies.
What if I need more money than my annuity payment provides?
You cannot increase the payment once it starts, but you may be able to take a lump sum withdrawal from the remaining balance if your contract allows it. Some annuities also allow you to exchange it for a different type of annuity that pays more. Contact your insurance company to discuss your options.
How often should I review my annuity payment calculation?
If you have not started payments yet, review it whenever interest rates change significantly or your circumstances change. Once you are receiving payments, there is no need to review unless you are considering a change. If you are thinking about delaying or changing your start date, request a new illustration to see the current payment amount.