Planning for retirement requires a lot of thought and planning. For annuities, one would like to calculate the amount of income they can expect their annuity to generate. There are many forms and shapes annuity calculations that make it complex. If one breaks the process up piece by piece, then it is simpler to understand.
Calculating Annuity Returns
The beginning of the formula for an annuity is simple, calculating the future value of an investment. You can take your investment; expect a percent return per year, for a certain amount of years. The basic formula for this is
- FV=PV*(1+i) n
- PV is the present value of the money
- i is the interest rate on the annuity
- n is the number of years to maturity
- FV is the future value.
The University of Illinois at Chicago offers an online annuity calculator that allows you to compute both future and present values of money and annuities. Try your annuity calculations here.
Calculating Annuities when you add Money Annually
Now, for an annuity, many people put money into it each year, which doesn’t add much complication to calculating an annuity, but does make the calculation more tedious. For each year, one must add the income
- FV=PV*(1+i)n+ PV*(1+i)n-1 … PV*(1+i)n-m or ?PV*(1+i)n-m
- m is the years since the first payment
- n represents the years since the first investment into the annuity
Each year you add more money, it adds more value that will compound itself until its maturity.
Calculating Taxes on Annuities
Now, the most complicated part of the annuity returns, is adding all of the taxes, insurance company fees, and premiums. These are complicated because of there are many of them and they are computed at different times. The first are the premiums and any transaction charges, which are deducted before the interest is compounded, and for simplicity we will combine into one lump sum,
- F; ? (PV-F)*(1+i) n-m
- Many insurance companies also have annual charges, which one can denote as R; ? [(PV-F)*(1+i) n-m]-R.
This formula represents what could be seen as a simple annuity. In practice, the charges can be based on percentages of your deposit (easy fix, just change F to *(1-f), where f is %charge). Also, for i, these rates will be is entirely up to the insurance company. The minimum guaranteed rate will give you the most conservative estimate, as well as a simpler one.
By – Domenic Gabriella for RetirementSecurity.com