Annuities provide periodic payments for an agreed-upon period of time, either now or in the future, for the annuitant or beneficiary. You can annuitize the annuity by making monthly, semiannual, or annual payments, and interest keeps accruing on the balance. On the other hand, you can calculate an annuity’s payout to see if it’s better than a lump sum.
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Why should you calculate your annuity payments? First, calculating an annuity’s monthly payout may help you decide whether the annuity’s payout is adequate for your investment goals. Studies have shown that retirement plan participants who see their account balances as level monthly annuities for life can better assess their retirement readiness and plan.
Because insurance companies can set their own rates and contract terms, calculating annuity payments can be tricky. Thankfully, there are some tactics you can use to calculate your annuity payments.
Determine the Type of Annuity You Have
Identify the annuity payout type.
What is the easiest way to calculate your annuity payments? Look at your annuity statement to find the principal amount, the annual interest rate, and the number of years in the contract.
If you don’t understand the jargon, contact the issuing firm. You will be informed whether your payout is immediate or deferred.
Immediate annuity.
You can think of an immediate annuity as a life insurance policy. Instead of paying regular premiums to an insurer that pays a lump sum upon death, investors give the insurer a lump sum in exchange for regular income payments until death — or for a specified time. After the investment is received — payments usually take one to 12 months to arrive.
Because they include principal and interest, they typically offer better tax treatment than other annuities. Those who need a higher-than-average income stream and are comfortable sacrificing principal for higher lifetime income tend to like immediate annuities.
Deferred annuity.
Payments are delayed for a longer period — greater than a year. As income payments are deferred, the insurance company is not on the hook for as long, allowing people to increase their income stream later in life for less money.
Many people choose these plans because they want a guaranteed income later in life or want to create a ladder of income over time. For example, a person may wish to work in retirement, but they will have to stop working eventually, and at that point, they will need annuities to provide guaranteed income.
Determine the Investment Type of Your Annuity
Your investment can be fixed or variable. Again, you can check your paperwork or call the issuing firm for this info. In addition, there is usually a rider with a percentage to pay.
Fixed annuity.
Annuity companies issue these fixed-interest investments. There’s a guaranteed interest rate, usually higher than bank CDs, and you can defer income or draw it immediately. Retirement and pre-retirees love these for the no-cost, modest, guaranteed investments.
You can, for example, earn 3% a month with a Due Fixed Annuity. If you invest money each month, you will know exactly how much money you will have in retirement.
Variable annuity.
In these accounts, you can choose from a variety of subaccounts. Most often, these are mutual funds. The performance of the subaccounts determines account value. However, a rider can lock in a guaranteed income stream no matter what happens — a good hedge.
Retirees and pre-retirees like variable annuities because they offer guaranteed lifetime income and capital appreciation.
Fixed indexed annuity.
You also have a third option with fixed-indexed annuities.
These are essentially fixed annuities that earn a variable interest rate when an underlying market index rises, such as the S&P 500. Market-based indexes provide a guaranteed minimum income benefit and a chance to increase principal.
As a result of participation rates, caps, and spreads, upside potential is limited. Those are all ways to trim your stock market returns. Due to this, these annuities never keep up with the market.
At the same time, they’re great for retirees and pre-retirees who want to take advantage of potential market appreciation without any fuss.
Know your liquidity options.
You can find out about your annuity’s liquidity options by consulting your contract or by contacting the firm that issued it. Early withdrawals may incur penalties, and you may receive less money than expected.
You can withdraw a portion of some annuities with withdrawal penalties. But others, like no-surrender or level-load annuities, may not have any penalty. The early withdrawal penalty tax on annuities is typically 10% if you withdraw them before you turn 59 ½.
Determining the Details of Your Annuity
Find out your annuity’s payout option.
With an annuity, you can also pick how your payouts are calculated. Among your options:
Income for a guaranteed period.
Also called a period-certain annuity, you’re guaranteed a specific payment for a set time frame, like five years or twenty years. In case of death before the end of the guaranteed period, your beneficiary will get the rest of the payments.
Lifetime payments.
You get a guaranteed income payout for your lifetime only. However, there are no survivor benefits. Also, there are fixed and variable payouts available.
You get a payout based on how much you invest and how long you live. Unfortunately, all payments stop at death, so your heirs don’t get anything.
Income for life with a guaranteed period of certain benefit.
Also known as life with period specific, this annuity combines both life and period certain elements. In addition to a lifetime payout, you receive phased payments over a given period.
Your beneficiary will receive the payment until the end of the period certain phase of the account if you die during that period. An arrangement with a ten-year period certain is common, for example. So, your survivor will receive payments for five more years if you die five years after you begin collecting.
Joint and survivor annuity.
If you die, your beneficiary will still get payouts for the rest of their life. So it’s a popular choice for married couples.
Find out the Principal Balance
In plain English, the principal balance of your annuity is what you paid to purchase it. It can be paid in one lump sum or as a regular payout, such as from your paycheck, for example. To calculate your payments, you will need to know the current balance if you make regular payments.
With a deferred annuity, you may purchase a one-time premium or pay regular or intermittent payments to build your fund principal. In contrast, when you buy an immediate annuity, you commit the annuity principal upfront. Additionally, that amount is one of the most important factors in determining your annuity income.
The principal balance of your annuity should also be listed on your statement.
Find Out the Interest Rate
Your annuity may come with a guaranteed minimum interest rate, meaning your interest rate will never fall below that level. To find your interest rate, you can call the provider or check your account online to see if it is variable. Or you can find a fixed rate on the paperwork you received when you purchased the annuity.
The interest rate should also be listed on your statement.
Depending on your circumstances, determine the number of your payments.
Take, for example, a $500,000 annuity with a 4% interest rate which pays a fixed amount every year for the next 25 years. Then, using the manual formula, Annuity Value = Payment Amount x Present Value of an Annuity (PVOA).
- A PVOA factor of 15.62208 is calculated for the above scenario. As a result, 500,000 is equal to the Annual Payment multiplied by 15.62208. Therefore, as a result of solving the equation for the annual payment, we arrive at $32,005.98.
- The “PMT” function in Excel can also be used to calculate your payment amount. To use this function, type “=PMT(0.04,25,500000,0)” in a cell and press “Enter.” There should be no spaces in the function. The value returned by Excel is $32,005.98.
In the event that your annuity will not start paying out for several years, adjust your calculations.
With the Future Value Table, you can figure out how much interest your annuity will earn between now and when it starts paying out. And how long do you have to wait until you start drawing it?
Suppose you have $500,000 that will earn 2% interest per year for 20 years before it pays out. As per the FV factor table, multiply 500,000 by 1.48595 to get 742,975. Then, using mathematical equations, future values are calculated.
- By using the FV function in Excel, you can determine the future value. The syntax is “=FV(interest rate, NumberOfPeriods, AdditionalPayments, PresentValue).” Simply enter “0” for the additional payments variable.
- Substitute this future value as your annuity balance, and recalculate the payment using the formula “Annuity Value = Payment Amount x PVOA factor.” Given these variables, your annual payment would be $47,559.29.
Annuity Calculators
Are you looking for a convenient and easy way to calculate your retirement savings? An annuity calculator may be helpful in such cases.
However, several annuity calculators are available online that can be used as a reference. You can use most of these calculators for free. Moreover, their primary focus is on providing personalized quotes tailored to your needs.
Fixed annuity calculator.
As a simple investment, fixed annuities are similar to CDs. However, with a fixed interest rate, you’re guaranteed a steady income. Depending on your guarantee period, this can last anywhere from a year to the full duration. A traditional fixed annuity and a Multi-Year Guarantee Annuity (MYGA) both fall into this category.
Since fixed annuities aren’t as complicated as other types, fixed annuity calculators are easy to use. You can, for example, use the Due Annuity Calculator. The following information is all that you need since you are guaranteed a 3% interest rate;
- Monthly, or One Time Contribution
- Yearly Contribution Percentage Increase (15, 10, 5, or Custom)
- Current Age
- Retirement Age
Afterward, you’ll be able to see how much you’ll receive each month based on the calculator.
Here is Due’s easy annuity calculator to help you.
Fixed indexed calculator.
Fixed index annuities offer market exposure and interest earnings. In the case of a market crash, however, the interest rate is guaranteed to never fall below zero. So it’s a win-win, so to speak.
However, when you use a fixed index calculator, you will need a lot more information. Among them are;
- Starting balance
- Annual contribution
- Current age
- Withdrawal age
- Current tax rate
- Retirement tax rate
- Taxable account return
- Initial interest rate
- Years’ initial interest is guaranteed
- Expected average interest rate
- Minimum guaranteed rate
You can use the Annuity Guys’ fixed index annuity calculator to see how it fits into your retirement plans.
Immediate annuity calculator.
You exchange a lump sum payment for a series of payments with this type, also known as a Single Premium Immediate Annuity (SPIA). You’ll get guaranteed payments for as long as the contract lasts. In addition, the income checks start right away, hence the name.
There is also a calculator for calculating immediate annuities at Due, and one at AIG. It will be necessary to gather data such as the amount of investment, the life expectancy, the annual rate of return, and the frequency of payments.
DIA calculator.
The structure of a Deferred Income Annuity (DIA) is similar to that of an SPIA. The difference, however, is when payments begin. As opposed to an immediate annuity, you receive annuity payments over time.
To obtain a quote from the DIA calculator, you will need to provide the following information;
- State of residence
- Birthdate
- Gender
- Source of fund (IRA or non-IRA)
- Deposit amount
- Start date for the income
Lifetime annuity calculator.
Lifetime annuities are generally purchased with a lump sum payment. As a result, you’ll get a guaranteed and predetermined income. The payout on a lifetime annuity can be immediate or deferred. By knowing this, you are better prepared to plan.
Using a tool, like the one from Charles Schwab, you can get annuity income estimates in minutes. Just pick how long you want the income to last.
If you want to estimate lifetime income, you should select the basis for the estimate. In other words, this is either the investment amount or the monthly income needed. Last but not least, you need to decide when you want to start receiving payments.
Qualified Longevity Annuity calculator.
Alternatively referred to as a longevity annuity, a QLAC is a type of special annuity. In a QLAC, you fund the annuity with your qualified retirement savings, such as those from an IRA or 401(k). As a result, the income will not start until after age 70 ½. Due to this, the IRS-mandated minimum distribution (RMD) rules are overridden.
FAQs
1. What is an annuity?
An annuity is a type of insurance product that converts a premium into a stream of guaranteed income for the rest of one’s life. They’re a good way to supplement your retirement savings and provide modest growth
2. What is an annuity payment?
An annuity payment is a fixed amount paid at regular intervals over time. In financial transactions, such as loans and investments, this type of payment is commonly used. As such, a regular and predictable payment schedule is important.
3. Is there a way to determine my retirement income needs?
Building a retirement-focused budget is the best way to determine how much income you will need in retirement. Analyze your expenses and income sources and adjust your spending accordingly.
4. How much do annuities pay out in retirement?
Depending on the interest rate, the premium, and the life expectancy of the annuitant, annuity payments vary. It’s easy to get an estimate of your monthly payments with an annuity calculator.
5. Are annuity payments monthly or yearly?
It depends on the terms of the agreement, annuity payments can be made monthly or yearly. Generally, a monthly payment rate and a yearly payment rate are expressed in months and years, respectively.
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