The formula
How to calculate replacement income
Replacing an income with a lump sum needs less than income times years, because the money left invested keeps earning while it is drawn down. This computes the amount that runs out exactly at the end of the period.
Using a real return keeps the whole calculation in today's money, so the income being replaced holds its purchasing power throughout — important over an 18-year period, where inflation would otherwise erode it by more than a third.
The inputs, one by one:
- Annual income to replace
- Years it must last (years)
- Real return on the lump sum (%) — after inflation, since the income needs to keep its value
The result updates on every keystroke. The URL updates too, which makes the filled-in version easy to bookmark or send to someone else.
The order the fields are filled in makes no difference to the result — the calculator recomputes the whole formula from whatever is currently in every field, not step by step. That means it is safe to adjust one number, watch the result change, and adjust it back, without worrying about resetting anything first.
Why replacement income matters
A calculation like this usually gets used at a decision point rather than out of curiosity — comparing two real options, checking a number a lender or adviser has quoted, or working out whether a plan that sounded fine in conversation still holds up once it is written down with actual figures. The maths itself is rarely complicated; what is hard is remembering which figures to use and in what order, which is exactly what a dedicated calculator is for.
It is also useful as a sense check before signing anything. A quote, an offer letter or a spreadsheet from someone else can contain an error, an optimistic assumption, or simply a different convention for rounding — running the same inputs through an independent calculator is a quick way to confirm a number before relying on it.
It is also worth being clear about what a single figure like this can and cannot settle on its own. It answers the specific question the formula was built to answer, and nothing more — a favourable replacement income result does not automatically mean a decision is a good one overall, since plenty of other factors that a formula cannot capture, from personal circumstances to how comfortable a commitment feels, usually matter just as much as the arithmetic. Use the number as one solid input among several rather than the whole of the decision.
A calculator like this one is often bookmarked and returned to repeatedly over months rather than used once, particularly for anything tied to an ongoing plan such as a mortgage, a savings goal or an investment being tracked. Because the figures live in the web address rather than only in memory, coming back to the same page with updated numbers is quicker than starting from a blank spreadsheet each time.
Worked example
A concrete run-through, using the values already in the fields:
- Annual income to replace: 36,000
- Years it must last: 18 years
- Real return on the lump sum: 2.5 %
That gives:
- Lump sum required: 516,721.09
- Simple income × years: 648,000
- Reduction from investing the lump sum: 131,278.91
These figures are only the calculator's own starting values, included so the working is visible rather than hidden inside the tool above. Replace them with your own numbers and the same arithmetic applies — nothing about the method changes, only the inputs feeding it.
Reading the result
The reduction line shows what investing the lump sum contributes. At a modest 2.5% real return over 18 years it is roughly 20% of the naive figure — meaningful, but far less than an equity return assumption would suggest.
Where this goes wrong. Assuming an aggressive return on money that must not run out. A bereaved family drawing living costs from a portfolio cannot ride out a downturn, so the return assumption should be conservative and the portfolio defensive.
A useful check on any unfamiliar result is to compare it against a rough mental estimate first — round the inputs to convenient numbers and see whether the calculator's answer lands in roughly the same territory. A wildly different figure usually means one of the fields was entered in the wrong unit, most often a percentage typed as a whole number where a decimal was expected, or the reverse.
Family income benefit pays a monthly amount for the remaining term and is usually cheaper, because the insurer's total liability falls each year. A lump sum offers flexibility but has to be invested and managed at a difficult time.
A payout is generally free of income and capital gains tax, but it forms part of the estate for inheritance tax unless the policy is written in trust. Writing it in trust also speeds up payment, since it avoids probate.
It returns lump sum required. With 36,000 annual income to replace, 18 years years it must last and 2.5 % real return on the lump sum, that comes to 516,721.09. Change any field and the figure moves with it.
Whenever one of the underlying figures changes — a new interest rate, a different balance, an updated term — since the result only reflects what is currently in the fields. There is no need to keep a separate record of past results; the web address for a filled-in version already carries the figures used to produce it.
Not unless a tax rate or a fee is explicitly one of the inputs above. Where it is not, the figure shown is a gross calculation, and any tax due depends on your personal circumstances and current tax rules, which are worth checking separately.
The arithmetic itself is exact — the calculator applies the formula shown above precisely, with no rounding until the final figure is displayed. The uncertainty, where it exists, is entirely in the inputs: an estimated rate or an approximate balance carries that same approximation through to the result.