Did you know that 46% of non-retirees in the United States say they won’t have enough money for their retirement? Annuity payments are a great way of offsetting this problem by receiving regular income. If you have an annuity, then you might want to know how much it’s worth if you decide to sell.
Or, you might just want to make sure that you can pay for any future investments. Regardless of your reason, everyone with a payment plan should know how to calculate annuity payments. Luckily, in this article, we’ll walk you through everything you need to know about calculating it. That way, you can better plan out your future. Let’s get started!
How to Calculate Annuity Payments
To calculate your annuity payments, you will need some information about your specific plan. You can get this information from your issuing firm. Or, you might own paperwork copies of your plan. Regardless, once you have the information follow these three steps to calculate your payments.
1. Determine What Type of Annuity You Have
Part of the problem with calculating annuity payments is the variety of different options out there. As such, the first thing you need to determine is what type of annuity you have. This starts with the type of payout you have on your annuity. There are two main types: immediate and deferred.
With immediate annuity payouts, you start receiving payments directly after making the initial investment. Deferred annuity payouts, on the other hand, accumulate interest over time. After you determine the type of payout, it’s time to move on to the investment type.
There are two main investment types: variable and fixed. Fixed annuities are more reliable because they offer a guaranteed payout at a guaranteed rate of interest. So, you know exactly how much you’ll be getting. Variable investments, on the other hand, are more sporadic. That’s because it relies on the underlying investments made with your annuity.
As such, payments will vary from month to month. If the investment is performing well, then you have the potential to make more. However, if it’s performing badly, then you could lose money. Finally, you should figure out the liquidity options that come with your plan. Sometimes you will suffer withdrawal penalties for selling your payments. Other plans allow you to withdraw a portion without incurring fees.
2. Figure Out the Details in Your Annuity Plan
Now that we know what type of annuity you have, it’s time to figure out the specific details associated with your payment plan. You can do this by looking over or requesting the specific documentation of your annuity. First, figure out your payout options. There are four common types:
- Pays the full amount over a period (excess balance upon death is given to beneficiaries)
- Pays the full amount until death (no beneficiaries)
- Pays the beneficiary for their entire life
- Pays over some time (includes a payout to the beneficiary upon death)
Typically, most people have the first option. Next, you need to find your principal balance. This is the amount you paid to purchase the annuity. It can be either in the form of initial payment or gradual installments taken out of your paycheck. You can find the principal balance in statements provided by the firm.
Finally, the last thing you need to find is your interest rate. In most cases, annuities come with a guaranteed minimum interest rate that your rate can never fall below. Otherwise, you can typically find it listed as a fixed rate. If you have a variable annuity, then you will need to contact the provider to find out the interest rate.
3. Calculate the Specific Value of Your Annuity Plan
Unfortunately, this next part will require a bit of math. First, you need to calculate the value of your payments. You can do this by following this specific formula:
- Annuity value = payment amount x present value of an annuity
- So, we can easily flip the formula like this: payment amount = annuity value x 1/present value of an annuity
You can find the present value of an annuity by following this formula here. Let’s do an example where your annuity value is worth $600,000 and the present value of your annuity falls at 16.445. If we plug this into the formula then we get something that looks like this:
- $600,000 = payment amount x 16.445
- Payment amount = 600,000 x 1/16.445
- Payment amount = $36,485
When Should You Consider Selling Your Annuity Plan?
Though annuity payments are a predictable source of income, the future isn’t always predictable. Unforeseen bills or debts are all it takes to send a financially stable family spiraling out of control. If you need fast cash, then you might want to consider selling your annuity payments.
Though you might lose a little money, you’ll have access to your funds right away. That way you can immediately put them toward any debts or overdue bills you have. Just make sure you look for a reliable purchasing company like Rightway Funding.
These types of businesses will purchase a portion or all of your annuity. If they’re trustworthy, then they’ll also give you advice on whether or not selling your specific annuity is the right move for you.
Want More Content? Keep Exploring
We hope this article helped you figure out how to calculate annuity payments. Whether you plan to stick with your regular installment plan, or sell your payments, knowing the value of your annuity payments is vital for planning future investments. If you aren’t sure whether or not your calculations are correct, then consider contacting your issuing firm to confirm this amount.
Alternatively, you can also hire an annuity payment broker. That way you’re 100% sure of what the value is before investing. Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep reading to find more topics that you’re sure to enjoy.