How to Calculate Compound Interest With Annual Income

by C. Taylor

An annuity is a special type of investment account, typically used for retirement. These vehicles offer annual compounded interest on the account balance, while allowing an annual withdrawal, which serves as income. Calculating the compound interest accrued in an annuity is complicated by the annual withdrawals because the balance is constantly changing. However, assuming the annual withdrawals remain constant, which is usually the case for annuities, then you can calculate the total amount received. Any amount received greater than the original account balance is interest.

1. Add 1 to the interest rate in decimal format. For example, if your annuity offers 8 percent interest, then you would use 1.08.

2. Raise this number to the power of zero minus the number of years in the annuity. For example, if you have a 15-year annuity, you would raise 1.08 to the power of -15 to get 0.3152417.

3. Subtract this figure from 1. In the example, this gives you 0.684758.

4. Divide the annual interest rate by this figure. In the example, you would divide 0.08 by 0.684758 to get 0.1168295.

5. Multiply this by the account balance at the start of the annuity payout period. If you originally invested $100,000 to begin the annuity payments, you would receive annual payments of $11,682.95.

6. Multiply this figure by the number of annual payments. In the example, your annuity pays for 15 years, so you multiply the annual payments by 15 to get a total payout of $175,244.25.

7. Subtract the original investment amount from the total payout to calculate the total interest accrued in the account. In the example, subtracting the original $100,000 investment leaves $75,244.25 earned through compound interest.

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