An annuity is an investment tool used to guarantee income over a given period of time after an initial investment. These payments can last any number of years and individual payments can be made monthly, every quarter, or yearly. Before investing in an annuity, an investor should understand the payments that will be made.
Determine the present value of the annuity. This is the quantity of money that the annuity is at this time worth. For example, if you invest $50,000 in an annuity today, $50,000 is the present value.
Determine the interest rate. This is the rate at which the money invested in the annuity will grow. Determine the interest rate per period. Since the payments for this example are issued monthly, divide the interest rate by twelve to get the monthly interest rate.
Determine how many payments the annuity will generate. For example, if the annuity will issue payments every month for the next ten years, there are a total of 120 payments.
Use the numbers found in the first three steps in the following formula to determine monthly payments.
The monthly payment equals the present value of the annuity divided by the quantity one minus the quantity one divided by the quantity one plus the interest rate per period to the power of the number of payments divided by the interest rate per period.
For instance, if the present value was $100,000, the interest rate per period was .5 percent, and the number of payments was 120, the monthly payment would be $1110.21.