How to Calculate an Annuity Value
Several factors are needed to calculate an annuity value. An annuity is a series of payments over time based on an initial investment plus earned income. As such, calculating its value involves factoring in the time value of money. With each payment, the remaining principle in the annuity decreases, which also must be accounted for, but the remainder continues to earn interest. The value of the annuity is the total that can be withdrawn over time until the principle is exhausted. With the correct data, the present value of the annuity can be calculated using a fairly complex equation.
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Instructions
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Find the annuity payment amount. The first essential piece of information is the amount of each annuity payment. For a fixed annuity, the payment will remain constant. The payment amount of a variable annuity can fluctuate, so it should be averaged or otherwise discounted based on the expected changes in the payment amount.
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Get the interest rate. The annuity pays back on the initial investment at a fixed or variable interest rate. As with the payment amount, the interest rate can be averaged or otherwise adjusted if it's expected to vary. Fixed-rate annuities used to be the norm, but variable rates have become more common.
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Figure the number of pay periods. The total number of pay periods is equal to the number of years in the life of the annuity multiplied by the number of pay periods per year.
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Calculate time value coefficient. Take the interest rate, expressed as a decimal, and add one to it. Raise this to the power of the number of pay periods. Subtract one and divide the difference by the interest rate as a decimal. For example, if the interest rate is 5 percent and the number of pay periods is 10, the first part of the equation would be: (1+0.05)^10. The value of this quantity is roughly 1.629. Subtracting one gives 0.629 and dividing by 0.05 gives the final coefficient of 12.57.
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Multiply the time value coefficient by the payment amount. In the example above, the time value coefficient was roughly 12.57. To find the total value of the annuity, you would multiply this by the payment amount. If each annuity payment was in the amount of $500, the total value of the annuity would be $6,288.95.
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