How to Calculate Monthly Annuity

How to Calculate Monthly Annuity

Step 1

Write down the formula for monthly payments of an annuity: Payment = Present Value / [(1- (1 /(1 + i)^n)) / i] where "i" is the interest the money in the annuity will continue to earn and "n" is the number of periods you will take payments.

Step 2

Define your variables. For this example, let's assume there is $100,000 in cash value in the annuity when you begin to take monthly income on it, that you want the income to last for 10 years and that the account will earn 3 percent interest while you take income. Therefore, $100,000 is the present value, 0.0025 is the interest per month (0.03/12) and there are 120 periods (12 months for 10 years).

Step 3

Insert the variables into your equation: Payment = 100,000/ [(1- (1/ (1 + 0.0025) ^120)) / 0.0025].

Step 4

Calculate: Payment = 100,000/ [1- (1/ (1.0025)^120)) / 0.0025] = 100,000/ [1- (1/ 1.34935) / 0.0025] = 100,000/ [1- 0.74109 / 0.0025] = 100,000/ [1- 0.74109 / 0.0025] = 970.

Step 5

The monthly anticipated payment for 10 years on $100,000 earning 3 percent annually is $970 per month.