How this instrument works
An annuity payout takes a lump sum already in hand — a 401(k) rollover, a pension buyout, a lottery jackpot's annuitized option, a structured-settlement award — and converts it into a level periodic payment sized so the balance reaches zero at a chosen date, not before and not after. This is the withdrawal side of retirement math, the counterpart to the saving side handled by an accumulation or compound-interest sheet: instead of asking how a contribution grows into a future sum, it asks how large a sum can be spent down over a fixed number of periods.
The formula is the loan-payment formula with the roles reversed. A lender uses it to size the payment that retires a debt over a term; here the same shape sizes the payment that retires a balance you own. Because the remaining balance keeps earning the stated rate while it is drawn down, the sustainable payment runs higher than a naive straight-line split — on the default sheet, splitting $500,000 evenly across 240 months gives $2,083.33, but the balance keeps earning 0.4% a period as it shrinks, so the true payment that reaches exactly zero at month 240 is $3,244.79, over a thousand dollars more per month.
The result assumes one constant rate applied uniformly across every period, exact on-schedule withdrawals, and no fees, taxes, or mortality pricing folded in. A real immediate annuity sold by an insurer prices longevity risk and expenses into its quote, and a self-managed drawdown earns a return that moves with markets rather than holding still — this sheet isolates the pure arithmetic of a fixed-rate, fixed-term payout so those real-world adjustments can be layered on top of a known baseline.
- Enter the sum you are spending down under Starting balance, $.
- Set Rate per period, % to the return the remaining balance earns each period it sits invested.
- Enter Number of payout periods for how many withdrawals the balance must exactly cover.
- Read Payment per period — the level amount that empties the balance on the last period, not before.
Worked example — a $500,000 balance over 20 years
Take the default sheet: a $500,000 starting balance, a 0.4% rate per period, and 240 payout periods — 20 years of monthly withdrawals. Feeding those three figures into the formula gives a payment of $3,244.79 every month, the exact level withdrawal that leaves the balance at zero the instant the 240th payment clears.
Multiply that payment across all 240 periods and the total withdrawn comes to $778,748.96 — roughly $278,748.96 more than the $500,000 that started the sheet, because the shrinking balance keeps earning 0.4% a period the whole way down. That gap is why the payment beats a naive even split: $500,000 divided flatly by 240 periods would suggest $2,083.33, but ignoring the interest still accruing on the unspent portion would leave real money sitting on the table by month 240.
Questions
Why is the payment so much higher than the balance divided by the number of periods?
Because the balance keeps earning the stated rate the whole time it is being spent down. Dividing $500,000 by 240 periods gives $2,083.33, but that ignores the 0.4% still accruing on whatever is left each period — the formula accounts for that ongoing return, which is why the true level payment that exactly zeroes the balance at period 240 comes out to $3,244.79, over a thousand dollars higher.
How is this different from a compound-interest or savings-growth calculator?
Those calculators run money forward: a starting contribution grows into a larger future sum as interest compounds on top of it. This one runs the same mechanics backward — a balance you already hold shrinks toward zero as level payments are drawn from it, even while the remaining portion keeps earning the same rate. Same underlying arithmetic, opposite direction of travel.
Is this the same as the 4% retirement withdrawal rule?
No. A percentage-of-portfolio rule like the 4% guideline is built to plausibly last an unknown number of years under variable market returns, with no promise of hitting exactly zero on any date. This formula does the opposite: it assumes one constant rate and solves for the exact level payment that empties the balance at a specific, chosen period count — useful for pricing a fixed-term payout, not for open-ended retirement planning.
What happens if the payout periods run out before I need more money?
The balance reaches zero on schedule and the payments stop — this sheet computes a period-certain payout, not a lifetime one. Insurers selling immediate annuities offer life-contingent versions that keep paying for as long as the annuitant lives, pooling longevity risk across many buyers; that pricing includes mortality assumptions this arithmetic does not.
Does the rate stay fixed for every single period in real life?
Rarely — this sheet assumes one constant rate per period to keep the arithmetic exact and auditable. A real invested balance earns a return that moves with markets, and an insurer's fixed annuity may credit a rate that resets periodically. Treat the output as the payment implied by one steady assumption, not a guarantee of what a variable account will actually support.
Who actually runs numbers like this?
Structured-settlement recipients comparing a lump sum against a scheduled payout, insurers pricing a period-certain immediate annuity quote, and retirees comparing a pension buyout offer against its equivalent monthly income all use this same formula — sizing a level payment against a known balance, rate, and horizon.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.