It all sounds great as you speak with the financial adviser to create a plan that should save you $100,000 in an annuity in the next 10 years. The money grows tax-deferred, so you won't pay taxes on the money until you take it out. The question becomes, how much can you take out for retirement income every month based on the $100,000 accumulated in the annuity?
Step
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
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
Insert the variables into your equation: Payment = 100,000/ [(1- (1/ (1 + 0.0025) ^120)) / 0.0025].
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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
The monthly anticipated payment for 10 years on $100,000 earning 3 percent annually is $970 per month.
