Content

• Steps
• Tips
• Warnings
• What do you need

Annuity (annuity) - a form of insurance or investment that is a source of income with recurring payments. It can be an effective addition to your retirement portfolio, but not everyone knows what it is. Understanding how an annuity works and how much income you can count on from it will help you plan your future and align your other investments accordingly. See step 1 to calculate your annuity payments so you can accurately estimate your future income.

Steps

1. 1 Determine the type of annuity.
   • Annuities can be fixed or variable (floating). The fixed annuity will have a guaranteed payment, while the floating annuity depends more on the efficiency of the investment.
   • Your annuity can be deferred, which means you can defer payments until a certain time. It can also be an immediate annuity where your payments start as soon as you make your first installment.
2. 2 Select a payment method for your annuity.
   • The most popular payment method is to pay the full annuity to the beneficiary for a specified period, with any balance after death.
   • There are other payment methods, according to which either the holder of the annuity or the remaining spouse will be paid, as well as payment options that combine 2 or more methods.
3. 3 Find out other annuity details, including opening balance and interest rate.
4. 4 Calculate the amount of payments based on your annuity option.
   • Let's say you have a $ 500,000 annuity at a 4 percent annual rate that makes fixed payments over the next 25 years.
   • Formula for calculation: Present value = Amount of annuity payment x Factor of present value of annuity (PVOA). A link to the table of Annuity Factors (depending on term and interest rate) is located in the Sources section of this article.
   • The PVOA factor for the above case is 15.62208. So, 500,000 = Payment x 15.62208. Transform the formula to highlight the variable by dividing both sides of the equality by 15.62208. We receive Payment = $ 32005.98.
   • You can also calculate your Payment in Excel using the "PMT" function. Function "= PMT (Interest Rate, Number of Periods, Present Value, Future Value)". For our example, type "= PMT (0.04; 25; 500000.0)" in the box, and press Enter. There should not be any spaces when typing in this function. Excel gives the result: Payment = $ 32005.98.
5. 5 Modify the calculation in case your annuity does not begin to be paid within a few years.
   • Find the future value of your starting fund balance using the Future Value Factor table (referenced in the Sources), which depends on the percentage that accumulates on your annuity from now until it starts to be paid and the number of years until you receive payments.
   • Let's say your $ 500,000 will be generating 2 percent per annum until it starts being paid 20 years later. Multiply 500,000 by 1.48595 according to the Future Value Factor table, you get 742975.
   • Find the future value in Excel using the FV function. Function "= FV (Interest rate, Number of periods, Additional payments, Present value)". Enter "0" for the additional payments variable.
   • Plug this future value into the opening balance and recalculate the Payment using "Present Value = Payment Amount x PVOA Factor". Given these variables, your annual payment would be $ 47,559.29.

Tips

• You can also recalculate your payments in case of more frequent payments. To calculate monthly payments instead of yearly payments, divide the interest rate by 12 and multiply the number of periods by 12, then enter those numbers into the formula.

Warnings

• Financial advisors agree that no source of income can be completely relied on. Diversification is one of the most important aspects of an investment portfolio.

What do you need

• Calculator or computer with Excel
• Annuity data