How to Calculate Fixed Annuity Payments

by C. Taylor

Placing money into an annuity allows you to receive fixed payments for a set period of time after retirement. The payment amount is determined by the annuity duration and the interest rate, which allows the cash balance to grow during that time. After the final payment is made, the cash in your annuity account will be completely exhausted, leaving you with a zero balance. The fixed payment amount can be calculated with the annuity formula.

1. Add one to the annuity's interest rate, in decimal form. As an example, if the annuity offers a 6 percent interest rate, you would add 1 to its decimal form to get 1.06.

2. Raise this figure to the "nth" power, where "n" is the number of years you wish to receive payments. In the example, to receive 15 years worth of annual payments, you would raise 1.06 to the power of 15, which results in 2.3966.

3. Divide 1 by this number. In the example, 1 divided by 2.3966 gives you 0.4173.

4. Subtract this figure from 1. In the example, this gives you 0.5827.

5. Divide the interest rate, in decimal form, by this figure. In the example, 0.06 divided by 0.5827 gives you 0.103.

6. Multiply this figure by the annuity starting balance. In the example, if you had a balance of $100,000, you would receive fixed annual payments of $10,300.

Photo Credits

  • Jupiterimages/liquidlibrary/Getty Images