Annuities, an income-producing investment purchased through an insurance company, can provide a steady income stream during your retirement. Annuitization is the process of converting the annuity funds into payments received monthly, quarterly or annually. The rate of return your annuity delivers depends on your life expectancy.
Annuity Payment Options
You can select to receive annuity payments two different ways. The lifetime option pays you for the remaining duration of your life. If you don't meet the life expectancy, the annuity funds revert back to the insurance company. A period certain annuity pays scheduled payments for a specified number of years. If you die before receiving the entire disbursement, a designated beneficiary can receive the remaining balance.
Determining Life Expectancy
Life expectancy tables are published using information from the Office of the Actuary of the Social Security Administration. The table provides the number of additional years you are expected to live based on your current age and gender. For example, a 25-year-old woman is expected to live for 51.25 more years. An 80-year-old man is expected to have another 7.1 years of life. The average number of remaining years for the individual needs to coincide with the life of the annuity.
Importance of Life Expectancy
Life expectancy charts do not take your health into consideration. Calculations are based solely on the general population for a given age and gender. The average U.S. life expectancy changes on an annual basis. At the time of publication, the average life expectancy for a male is 75.68 and a woman's life expectancy is 81.58.
Calculating Annuity Payments
Once you know your life expectancy and the value of your annuity, you can calculate the payment amount with an annuity calculator. Calculating the payment yourself can be complicated. The payment is equal to the the principal multiplied by the periodic interest rate multiplied by 1 plus the interest rate times the power of the number of expected payments. The result is divided by 1 plus the rate multiplied by the number of payments after subtracting 1 from the answer. There are also annuity calculation tables available that simplify the process and help eliminate mathematical errors.