How to Calculate the Income Payable Through an Annuity

by C. Taylor

An investment annuity is a retirement vehicle that offers guaranteed income payments during your retirement years. The total annual income paid through an annuity is a result of the value at the beginning on the payout period, the length of the payout period and the interest rate. If you have this information, then using the annuity formula allows you to calculate your annual income resulting from annuity payments.

1. Add 1 to the interest rate, in decimal form, and raise this figure to the nth power, where "n" is the number of years of the payout period. As an example, if the annuity offered income payments for 20 years with a 5 percent interest rate, you would raise 1.05 to the power of 20 to get 2.6533.

2. Subtract the reciprocal of this number from 1. The reciprocal is simply 1 divided by the number. In the example, you would divide 1 by 2.6533 to get 0.3769, and then subtract that figure from1, resulting in 0.6231

3. Divide the interest rate by this number. In the example, 0.05 divided by 0.6231 gives you 0.08024.

4. Multiply this figure by the annuity value at the beginning of the payout period. In the example, if you invested $120,000, you would multiply this figure by 0.8024 times to derive an annual income of $9,629.27.

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