Annuities are structured to pay recipients a set amount of money each year over a number of years. Payments can be made monthly, semiannually or annually, and interest continues to accrue on the balance of the annuity over its life. Calculating the periodic and total payout of an annuity can help you determine whether it is more favorable than receiving a lump-sum payment. Calculating an annuity's monthly payout can also help you determine whether a particular annuity is sufficient to meet your investment goals.
Step 1
Check your annuity contract documentation to find the principal amount, the annual interest rate and the number of years in the contract.
Step 2
Calculate the number of payments received each year, as well as the periodic interest rate. Divide the annual interest rate by the number of payment periods per year to find the periodic interest rate.
For example, monthly payments will occur 12 times a year; if your annual interest rate is 12 percent, your periodic interest rate will be 1 percent (12 / 12).
Step 3
Multiply the number of payments per year by the number of years in the contract to calculate the total number of payments throughout the life of the annuity.
For example, if your annuity will last 20 years, paying biannually, 40 payments will be made over the life of the contract (20 * 2).
Step 4
Assign variables to the values you will need to calculate the annuity payout. 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
Use the following formula to calculate the value of each periodic payment:
Periodic payment = ( P * R * ( 1 + R ) ^ N) / ( (1 + R) ^ N ) – 1 )
Step 6
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.
References
Resources
Tips
- Annuity payout calculators are widely available online if you'd prefer not to do the calculations yourself.
Writer Bio
David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.