How to Calculate Annuity Benefits

by Alan Kirk ; Updated July 27, 2017

Items you will need

  • Present value of the annuity
  • Interest rate
  • Number of payments you will receive

Many investments are paid out on a monthly, quarterly or yearly basis instead of in a lump sum. Calculating the amount of money you will receive for each payment can be completed following several mathematical computations. Some examples of investments that pay you on a periodic basis include retirement plans and financial settlements. If you are lucky enough to win a large annuity in the lottery, it is computed this way as well.

Step 1

Determine your monthly interest rate. To do this you will need to divide your annual interest rate you are earning on your annuity by 12. For this example, let's assume your annual interest rate is 6 percent. This means your monthly interest rate is 1/2 percent, or .005.

Step 2

Add one to your monthly interest rate and then multiply it by itself the number of times as the number of payments you will receive for your annuity. For this example, we will use a basic calculation where your annuity will be received over one year, paid monthly. This means you will receive 12 payments. In this example 1.005 is multiplied by itself 12 times, equaling 1.0616.

Step 3

Subtract one from the result you received in step 2. In this example the calculation would be 1.0616 - 1, which equals .0616.

Step 4

Divide your result in step three by your monthly interest rate, which is .005 in decimal form. The calculation in this example is .0616 / .005, which equals 12.32.

Step 5

Divide the amount of money you are expected to receive at the end of the annuity by the result in step four. In this example we are calculating the payments you will receive on a monthly basis for a $5,000 annuity. The calculation would be $5,000 / 12.32, which equals $405.84

Tips

  • Calculations for longer term annuities are done using the same steps, just the number of years could be much higher for something such as a large lottery award or a court judgment. For those calculations, break it down step by step as this article guides you, to reduce the chance of mathematical errors.

Warnings

  • If you decide to use a calculator instead of computing the payment manually, read the manual carefully on your calculator. A common error is made when multiplying the periodic interest rate by itself based on the number of payment periods.

About the Author

Alan Kirk has been writing for online publications since 2006. He has more than 15 years' experience in catering, management and government relations. Kirk has a bachelor's degree in business management from the University of Maryland.