How To Calculate Annuity Payments

How To Calculate Annuity Payments. The annuity payment formula is used to calculate the periodic payment on an annuity. The annuity payment formula is used to calculate the periodic payment on an annuity. An annuity is a series of periodic payments that are received at a future date. The present value portion of the formula is the initial payout, with an example being the original payout on an amortized loan.

The annuity payment formula shown is for ordinary annuities. This formula assumes that the rate does not change, the payments stay the same, and that the first payment is one period away. An annuity that grows at a proportionate rate would use the growing annuity payment formula. Otherwise, an annuity that changes the payment and/or rate would need to be adjusted for each change. An annuity that has its first payment due at the beginning would use the annuity due payment formula and the deferred annuity payment formula would have a payment due at a later date.

The annuity payment formula can be used for amortized loans, income annuities, structured settlements, lottery payouts(see annuity due payment formula if first payment starts immediately), and any other type of constant periodic payments.

How to Calculate Annuity Payments

An annuity is a form of insurance or investment that provides an income source with periodic payments. It can be an effective addition to a retirement portfolio, but it can also be confusing. Understanding how your annuity works, and the income you can count on from it, well help you plan for the future and adjust your other investments accordingly. See step 1 below to begin calculating annuity payments, so you can have an accurate estimate of your future income.

1
Determine the type of annuity.

Annuities can be fixed or variable. A fixed annuity will have a guaranteed payout, while the variable annuity depends heavily on the performance of its investment.
Your annuity could be deferred, which means you can postpone payments from it until a specified time. It could also be an immediate annuity, where your payments begin as soon as you make your first contribution.


2
Select the payout option for your annuity.

The most popular payout option pays the full amount of the annuity over a specified period with any balance after death being paid to the beneficiary.
There are other payout options that will either pay the annuity holder or the holder and the remaining spouse for life, as well as payout options that combine 2 or more options.


3
Find the other details of the annuity, including the principle balance and interest rate.

4
Calculate the amount of the payments based on your specific annuity situation.

For example, assume a $500,000 annuity with a 4 percent interest rate that will pay a fixed annual amount over the next 25 years.
The manual formula is Annuity Value = Payment Amount x Present Value of an Annuity (PVOA) factor. The a link to the PVOA factor table can be found in the Sources section of this article.
The PVOA factor for the above scenario is 15.62208. 500,000 = Payment x 15.62208. Convert the formula to isolate the variable by dividing both sides by 15.62208; Payment = $32,005.98.
You can also calculate your payment amount in Excel using the "PMT" function. The syntax is "=PMT(Interest rate,Number of periods,PresentValue,FutureValue)." For the above example, type "=PMT(0.04,25,500000,0)" in a cell and press "Enter." There should be no spaces used in the function. Excel returns the value of $32,005.98.

5
Adjust your calculation if your annuity will not begin paying out for several years.

Find the future value of your present principle balance by using the Future Value table (linked in the Sources section), the rate of interest that will accrue on your annuity between now and when it begins to pay out and the number of years until you begin drawing payments.
For instance, assume that your $500,000 will earn 2 percent annual interest until it begins paying out in 20 years. Multiply 500,000 by 1.48595 as per the FV factor table to find 742,975.
Find the future value in Excel by using the FV function. The syntax is "=FV(InterestRate,NumberOfPeriods,AdditionalPayments,PresentValue)." Enter "0" for the additional payments variable.
Substitute this future value as your annuity balance and recalculate the payment using the "Annuity Value = Payment Amount x PVOA factor" formula. Given these variables, your annual payment would be $47,559.29.