How to Calculate the Expected Return on an Annuity

by C. Taylor

Retirement annuities offer regular fixed payments that serve as a source of income during retirement years. Annuities may continue making payments for the annuity term, or they may pay continuously until the investor dies. The total summation of these payments constitutes the expected return of the annuity. If the expected return matches the initial investment, the annuity is considered to pay fair market value with any deviation thereof offering less or more than fair market value.

Look up your age and sex on a life expectancy table to determine the statistically predicted number of years remaining in your life.

Multiply the lesser of your life expectancy or the annuity term by the number of payments per year. As an example, a 72-year-old man is expected to live 10.8 more years. If a 15 year annuity pays monthly, multiply 10.8 times 12 monthly payments per year to get 129.6.

Multiply this figure by the amount of the payments. Continuing with the example, $500 monthly payments constitute an expected return of $64,800. Therefore, the fair market value is also $64,800.

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