How to Calculate an Annuity Paid at the Beginning of the Year

by C. Taylor

An annuity that is paid at the beginning of the year is called an annuity due. This type of annuity is slightly different than an ordinary annuity because payments are sent out a year earlier. For the most part, the annual payment calculation is the same, except you have to modify the formula to compensate for this timing. To calculate the monthly payment, you need to know the interest rate earned, the number of years payments will be received, and the account balance at the beginning of the payment period, which is known as the present value.

1. Add one to the interest rate and raise this number to the power of the number of years payments will be received. As an example, if your 20-year annuity offered 5 percent interest, you would raise 1.05 to the power of 20 to get 2.6533.

2. Divide this number into 1. In the example, this gives you 0.37689.

3. Subtract this number from 1. In the example, you would have 0.62311.

4. Divide this number by the interest rate. In the example, where the interest rate is 5 percent, this gives you 12.4622.

5. Multiply this value by 1 plus the interest rate. In the example, multiplying by 1.05 gives you 13.0853.

6. Divide this number into the annuity's present value to get the annual payment amount. In the example, if you had $100,000 in the account, you would receive 20 annual payments of $7,642.15.

Photo Credits

  • Hemera Technologies/ Images