An annuity is a series of payments made to an individual at a predefined interval. The most common form of annuity is the ordinary annuity that pays at the end of said interval. The variables in this annuity are the nominal interest rate, length of the annuity in years, length of each interval and starting principal. Some annuities will not have a starting principal and will reflect lifetime payments made to an individual from another entity. Regardless of the nature of the annuity, an annuity calculator can help you determine several different factors related to the annuity and will be a valuable tool if you are receiving payments from an annuity or are considering starting one.
An annuity may be as simple as a savings bank account or insurance payments. The flipside of an annuity is an annuity-due, which has you making monthly payments toward a principal. This would be most common for mortgages. You may want to use a mortgage calculator, rather than an annuity calculator for this type of determination, but it is possible to use an annuity calculator in this case.
One may consider starting an annuity if they wish to invest a sum, have it grow nominally, yet still collect from that investment on a regular basis. However, do not expect the annuity to grow quickly and indeed the annuities with the best growth, in addition to a high growth/interest rate, will have fewer intervals that diminish the principal amount.
There are a number of factors to consider when dealing with an annuity, so use an annuity calculator before and after speaking with a financial advisor and always speak with that advisor about the results from the annuity calculator. Even though these calculators will use predefined mathematical formulas, there may be terms and conditions in your annuity that makes your situation unique. Also, be aware of the growth and/or interest rates. You need to ensure that the rate is legitimate and not subject to limitations, such as having a lower rate for a higher interval of withdrawal transactions.
Why should I use an annuity calculator?
An annuity calculator can help you determine a number of factors related to withdrawing from the annuity. For an existing annuity, you may determine how long the annuity will last, given your current withdrawals. If you are planning on getting an annuity, an annuity calculator can help you determine the impact of the growth rate on the principal. There are a large number of scenarios that necessitate using an annuity calculator.
What are the terms used on the annuity calculator?
Withdrawal Amount – this is how much will be taken out of the annuity. You will need to indicate the interval between withdrawals. If you want to know how much you may withdraw from the annuity given a specific interval and length, as well as a specific growth rate and principal, leave this area blank. Some annuity calculators will display a chart with the remaining balances after each interval after you have performed this calculation.
Starting principal – here you must enter the initial amount of the annuity. Follow the formatting suggestion on the annuity calculator, usually to enter the amount without the dollar ($) sign or commas. Entering the number incorrectly will result in an error. If you want to know how much principal is required to have a certain withdrawal amount within a specific time frame, then leave this area blank and fill in the information in the rest of the annuity calculator.
Growth rate – this is the percentage at which the annuity grows. You will know the growth rate before you open the annuity. If you are unsure of the growth rate, speak with the lender of your financial advisor immediately. The growth rate is a critical piece of information to have when using the annuity calculator. This is the only variable that cannot be determined independent of the others on an annuity calculator.
Interval between withdrawals – how often can you be paid from the annuity? Most annuity calculators will give you the option of monthly, quarterly, semiannually and yearly. The interval will be the greatest determinant of how long the annuity will last.
Length of the annuity in years – this is how long you will receive payments from the annuity. If you are looking to calculate how long the annuity will last, when the growth rate is taken into consideration, leave this area blank so when you do the calculation on the annuity calculator, you will know the length of the annuity in years.
How do I use the annuity calculator?
Using an annuity calculator is easy, as long as you gather all necessary information prior to beginning your calculation. To use this annuity calculator, we will provide four scenarios.
John has an annuity worth $10,000. It grows at a high rate of 5% annually and he withdraws $1,000 from this annuity every year. How long will Jon’s annuity last?
Here we glean the following information:
Starting Principal: 10,000
Annual Growth Rate: 5
Withdrawal amount: 1,000
We plug this information in to the annuity calculator, leaving the “length of annuity in years” field blank, as this is what we are trying to determine. After we calculate, we see that John’s annuity account will last 13 years, 3 months. The growth rate has allowed John to receive a little over $3,000 more than the principal worth of the annuity over the life of the annuity. If you were to buy this annuity, he would enjoy the yearly fixed income and its modest growth that provides a few extra years.
Let us try another example, determining the amount of principal necessary for a certain payout by the annuity.
Jane would like an annuity that grows at 3% and can withdraw $1,000 every 3 months over the next three years. Using the annuity calculator, how much principal will Jane need to invest in the annuity?
Starting Principal: X
Annual Growth Rate: 3
Withdrawal amount: 1,000
Length of annuity in years: 3
We plug this information into the annuity calculator to determine that Jane will need to put $11,520.67 into the annuity in order to collect that sum, quarterly, over the next three years. The annuity calculator for the first three quarters looks like this:
Remaining Balance for Term of Annuity
Quarter Remaining Balance
James would like to determine how much he may withdraw from an annuity every month given the conditions of the annuity. James’s starting principal is $50,000 and the annuity will grow annually at 2%. James wants this annuity to last 20 years.
We are able to glean this information for the annuity calculator:
Starting Principal: 50,000
Annual Growth Rate: 2
Withdrawal amount: X
Length of annuity in years: 20
After entering this information into the annuity calculator, we are able to determine that James may collect $252.52 every month, for the next 20 years, from his annuity. There will be 240 payments over all. James may now choose to increase the principal before starting the annuity, if we would like more monthly income for the next few years. Doubling his principal to $100,000, for example, would have him receiving $505.04 every month, which is a tidy sum to supplement other income.
In the last scenario, we use the annuity-due concept on the annuity calculator, so the terms used will be different:
Jane has a $6,000 loan and she makes payments of $250 every month. The interest on this loan is eight percent.
How long will it take Jane to pay off this loan?
Starting Principal: 6,000
Annual Growth Rate (=interest rate): 8
Withdrawal amount (= payment amount): 250
Length of annuity in years (length of loan): X
After entering this information into the annuity calculator, we are able to determine that it will take 2.17 years (27 months) to repay this loan. Jane will need to make all payments. The calculator assumes the interest rate is fixed.
With the proper information, one can use the annuity calculator to make some key personal finance decisions. Be aware that some annuities will have limitations on them that prevent or defer withdrawals for some time, or may have variable growth rates. Variable growth rates especially will skew the projections give to you by an annuity calculator. Use the annuity calculator with the advice of a financial professional to understand the factors that affect your annuity.
This should demonstrate how useful an annuity calculator should be in terms of planning for investment and determining the appropriate amount to be withdrawn and at what interval. As with all financial calculators you find on the internet, an annuity calculator should not be used in lieu of a financial advisor. You should use the annuity calculator to have a guideline before speaking a financial advisor or lender. Never enter personal information or information that may compromise your identity into these programs and never pay to use or see the results from an annuity calculator.