Annuities are structured to pay retirees a set amount of money each year over several years. When annuitizing the annuity, payments may be made monthly, semiannually, or annually, and interest continues to accrue on the annuity’s balance throughout its existence. An annuity’s periodic and overall payout may be calculated to see whether it is more attractive than a lump-sum payment. Calculating an annuity’s monthly payout might also assist you in determining whether a given annuity is adequate for your investment objectives.
Step 1: Check Annuity Statement
Check your annuity annual annuity statement to find the principal amount, the annual interest rate, and the number of years in the contract.
Step 2: Calculate The Number of Payments
Calculate the number of payments received each year and the periodic interest rate. Then, divide the annual interest rate by the number of payment periods per year to find the periodic interest rate.
Helpful Tip: Use an annuity calculator.
Step 3: Multiply The Number Of Payments By The Number Of Years
Multiply the number of payments per year by the number of years in the contract to calculate the total number of payments throughout the annuity’s life.
Step 4: Assign Variables
Assign variables to the values you will need to calculate the annuity payout. For example, write out the following variables with their corresponding values: n = number of payments per year, T = number of years, N = total number of payments in the annuity contract, r = annual interest rate, R = periodic interest rate, P = principal amount.
Step 5: Periodic Payment Formula
Use the following annuity formula to calculate the value of each periodic payment:
Periodic payment = ( P * R * ( 1 + R ) ^ N) / ( (1 + R) ^ N ) – 1 )
Step 6: Multiply Periodic Payment
Multiply the periodic payment by N, the total number of payment periods in the annuity, to find the total value of the annuity payout over its life.
Next Steps
Annuities are a great way to ensure you have a steady income in retirement. They offer retirees peace of mind by providing them with a set amount of money each year. When annuitizing the annuity, you must understand how the payments will be made and what interest rate you’re locked into. Our team can help you find the perfect annuity for your needs and walk you through the process of annuitization so that you feel confident about your decision.
Use our fixed income annuity calculator to get estimates, then contact us today for a free quote!
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