Steps to Calculate Annuity Payments

To know the steps to calculate annuity payments is necessary for better decisions of investment in this type of insurance policy. For example, if you have estimated future per month earning is $ 1000 but your requirement is $ 2000, you can invest more in same annuity plan. So, here, we are teaching the simple steps to calculate annuity payments to you.

1st Step : Know the Different Types of Annuity 

There are 4 main types of annuity plan. One plan in which you have invested money and you get the guarantee of return. Second plan, in which, you get return on the basis of the performance of your investment. Third plan in which you get return after sometime. Fourth plan in which you get return and receive return immediately after investment. On all these types, amount of investment and rate of return may be different. Now, it is on you which plan you will buy. So, know all these plans and select any one is necessary for calculation of annuity payments which you will get from your investment.

2nd Step : Know the Different Types of Annuity Settlement

In previous content "Types of annuity settlement" I have explained, how will you get the annuity payment. In one plan, you will get life time payment with refund of principle to your family after death. But in other plan of annuity settlement, there is the provision of refund of principle. So, you have to choose best annuity settlement. On this basis, amount of investment may be different. So, for calculation of annuity payments, to know and select any one annuity settlement type is necessary.

3rd Step : Know total Amount of Principle Investment and Rate of Return

Now, after crossing above two steps, it is the time to study the proposal letter in which you will get the exact principle and rate of return on annuity plan.

4th Step : Manual Calculation of Annuity Payments

Just take the blank paper and ready to calculate the estimated amount of annuity payments.

Formula of Annuity Value

=  Annuity Payment Amount X Present Value of Annuity Factor (PVOAF)

Present value of annuity factor can be calculated on the basis of rate of interest and period of investment. Its also name is present value interest factor of annuity. There is its table from where you can find the factor value.

For example, you have invested $ 100,000 at 5% for 25 years. You can get its annuity payment with following ways.

1,00,000 = Annuity Payments X 14.096

1,00,000/14.096 = Annuity payments per year

$ 7094.21 =  Annuity payments per year

You can also use PMT formula of excel for calculating annuity payments.

Related : Equivalent Annuity Method


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Accounting Education: Steps to Calculate Annuity Payments
Steps to Calculate Annuity Payments
Accounting Education
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