# How to Calculate the Expected Return on an Annuity

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According to a survey by TD Ameritrade in 2020, roughly ​58 percent​ of Americans felt uneasy about their retirement savings. Depending entirely on Social Security will not make for a stress-free retirement, but planning ahead with an annuity is a great place to start. Annuities can be purchased at any age, whether you are on the verge of retiring or just starting to think ahead for retirement.

There are several different ways to invest in an annuity, and it is important to understand the expected return on contracts for the different options. Let's see how to calculate the expected return on an annuity.

## Factors That Influence Returns

When calculating the return on annuities, there are a couple of factors that will determine the final numbers. There are several tools available to find the numbers you need to get an accurate calculation.

### Length of Annuity Contract

With every annuity, you have options for length of time. You will find there are seven-year annuities, 10-year annuities, 20-year annuities and lifetime annuities. They all have their own requirements that applicants must meet before purchasing.

Read More​: What is a 7-Year Annuity?

### Gender Influences on Annuities

In addition to length, insurance companies will also take into consideration your gender. Because the life expectancies are different for men and women, it is important to buy the right length of time on your annuity for your expected lifetime. Here is a chart to help calculate your life expectancy.

### Amount of Money in the Annuity

The final and perhaps most important factor is the amount of money you put into the annuity. This amount will need to be hefty in order to provide the return you need. Now let's see how the expected return on contracts differs for the same amount of money across the types of annuities.

## Expected Return on Contract for Immediate Annuities

Immediate annuities are just as they sound – an immediate payout on a lump sum of money that you give to an insurer. These are usually what retirement-aged individuals would purchase. The advantage of an immediate annuity is the guaranteed, lifetime income that is accessible right away. There are two kinds: fixed and variable.

### Fixed Immediate Annuities

Fixed immediate annuities are safe and secure since the money isn't being moved between different funds in the market. To calculate the return on a fixed immediate annuity, you would simply take the total amount you put into the annuity divided by the number of months you have left on your calculated life expectancy and you will get your monthly income amount.

Example: If you are a 65-year old woman with \$100,000 to invest in a fixed immediate annuity, you would receive a base \$259.20 per month for the rest of your life starting the month after you purchase the annuity. This is determined by multiplying the 21.6 years left for the expected life of a 65-year-old woman by 12 (number of payments per year if you want a monthly payment).

That is the base payment without any interest accrual, and you should not settle for a lower payout per month. The monthly payment will be higher with the additional interest that the contract specifies. (Current rates are hovering around ​3 percent​ for annuities.)

### Variable Immediate Annuities

Variable immediate annuities are a little different from fixed in that the money you put in the account is invested in different areas of the market. This is a way to grow your annuity in hopes of staying on top of inflation before you retire. You should never receive a monthly payment lower than the base amount such as the \$259.20 mentioned in the above example.

## Year Term Annuities Returns

If investing before retirement age, you'd most likely want to do a year term annuity. These are each different with their own interest rates, but you are not allowed to use the money right away. They are similar to certificates of deposit.

To calculate the expected return on contract for these, you would simply take the annual assumed interest rate and multiply it by the principal. You will not get the full amount of interest unless you leave the money in the account for the full length of the term in contract. Here is an easy calculator to work out potential investments.

## Planning Ahead for a Happy Retirement

With all the types of annuities, you will find a return on your money that will give you extra for retirement. It is important to diversify your retirement funds and not rely solely on Social Security to carry you through your retired years. Annuities offer safe options for those who want security with their investment money.