Annuity Payout Calculator is a handy tool that can help you in the decision-making process regarding investing in an annuity. Before we dive into numbers, let’s examine what annuity payout means.
Essentially, we’re dealing with a financial contract here that provides us with a steady amount of money over time. With this kind of investment, we have a long-term goal in mind. It is to obtain a source of secured monthly income that in some cases may last over an entire lifetime, but more on that later.
How Annuity Fund Works
An insurance company invests the money people deposit in certain financial assets like stocks or bonds for example. This way, the funds you put into annuity gains interest. The whole process consists of three phases, the accumulation phase, the annuitization phase, and the payout phase.
For the duration of the accumulation phase, an annuity is funded up to the point of annuitization. The annuitization phase is a moment in time when an insurance company stops receiving money from investors. At that point, the payout phase starts.
There are many options when it comes to annual payouts, and keep in mind that some of them may not be available with some annuities. The two major options are fixed length and fixed payment.
Fixed Length
This option, also called period certain payout or fixed-period, enables annuitants (you) to set a number of years during which every annuity payment will be guaranteed. Over this period, payouts are realized on a monthly basis. In case of death, any remaining funds are passed to their heirs.
Fixed Payment
This option doesn’t allow annuitants to set the time but the fixed amount they’re to receive with their monthly installments. This will last as long as the balance of the annuity is depleted. This means the annuity payout’s lifetime depends on interest, annuity’s balance, and the monthly amount. For example, a bigger balance tends to extend the lifetime, but a higher monthly amount will act in the opposite direction.
Lump-Sum
The Lump-Sum option lets us get the entire annuity in a single withdrawal. While this option might seem nice, getting a huge sum of money at one point might not be the best option in terms of tax.
Life Only
This payment option lasts until the annuitant lives. The payment amount is determined by calculated life expectancy. If the life expectancy is longer, then the monthly amount will be lower and vice versa. One thing to keep in mind is that there is a possibility to get less value than the value of the annuity but it can also exceed the value of the annuity. This depends on life expectancy.
If the annuitant outlives the calculated life expectancy, they get more value than they invested. Of course, if the opposite is true, they get less. For example, if they die in the first year of the annuity the remaining capital is lost.
Period Certain Annuity
In essence, it combines the life only and fixed-length approaches. It pays the annuity for life and lets the annuitant set a fixed period. During this time, the insurance company pays an assigned beneficiary even if the annuitant dies.
Joint and Survivor
In the case of the death of the main annuitant, this option lets their spouse continue to receive a monthly income.
The Annuity Payout Formula
A = PV / (1 – (1 + i / k)-n * k) / (i / k)
A – The initial balance
PV – The monthly amount
i – The interest rate
k – The number of compounding periods, usually 12 for twelve months.
n – The number of years
We are going to put this to use with an example. Let’s say we want to take $1,000 every month for 20 years after we retire. Let’s also assume an interest rate of 6% (0.06 in decimal numbers). Taking monthly payments means we’ll compound monthly so k=12.
This gives us the following:
This means when you retire, you will need to have $139,600 on your account to be able to receive $1,000 every month. The total value of the annuity is 240 months; for $1,000, it equals $240,000. The total interest earned in this case is $240,000 – $139,600 = $100,400.
How to Use the Annuity Payout Calculator
Let’s start with the Fixed-Length payout option and let’s assume we have an initial balance of $100,000. We will keep our interest rate like in the previous example at 6%. The fixed-Length option allows us to set our time, and in this example, it will be 20 years.
Entering these parameters in our calculator gives us the result of $707. This means we’ll have $707 every month for 20 years before our initial balance is depleted. The total interest, in this case, is $69,705.
What will happen if we change our time to 15 instead of 20 years? Entering this into the calculator gives us the result of $835 while the total interest earned is $50,353. Lowering the time will result in higher monthly payments but at the price of less total interest.
Let’s now check the Fixed Payment option. In this case, we can’t choose the time; instead, we choose a fixed monthly amount. Again we will assume an initial balance of $100,000 and we’ll choose $1,000 for our fixed payment.
Now we get different results. Our annuity will last for 11 years and 6 months. In other words, we will receive $1,000 each month for 11 years and 6 months, with the total interest earned at $37,364.
If we opt for a lower monthly amount, the annuity will last longer. Let’s keep everything the same and enter $800 instead of $1,000 for our monthly payment. Now the calculator gives us the result of 16 years and 2 months while the total interest earned is $54,477. This gives us a longer annuity and more total interest but at the price of a lower monthly payment.
FAQ
Are Annuities a Good or Bad Idea?
The main risk with this type of investment is that you may not get the full value of the annuity if you die too early. Also, annuities tend to be pricier than other forms of investments. However, the safety that comes with annuities is for sure tempting. Play with the calculator, try different values, it will help you get a better idea about whether the annuity is something you should consider.