How to Accumulate a Retirement Annuity
Saving for retirement is a tricky business. Investment plans such as 401(k)s and IRAs require a strong stock market. Another option is to invest a lump sum of money in an annuity plan that will pay out a set amount of money each year for a certain number of years. This how-to guide will give you the basic tools to determine how much money you will need to invest to get a predictable annuity return after you retire.
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Things You'll Need
- A bank
- Money
- An Internet connection (for automatic calculation)
- A scientific calculator (for manual calculation)
Instructions
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Determine how much money you want to receive per yer and how many years you want to receive that money for. For instance, if you plan to retire at 65, you may wish to receive $5,000 a year for 20 years.
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Visit your bank to learn more about their current rates for annuity plans. Conversely, you may want to look at online banks such as ING Direct or financial trading companies such as Fidelity to compare rates.
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Visit a free online annuity calculator website such as the Money Chimp or the Immediate Annuities Guide. Enter the per year payout you seek, the interest rate and how many years you wish to receive payment in the boxes provided. Make sure you select the payout option that says "end of each year." Press the "calculate" button and the calculator will tell you how much you will need to invest up front.
If you wish to calculate this amount mathematically, use a scientific calculator to plug your interest rate and term length into the basic annuity formula ((1-(1+i)^-n)/i), where i equals your interest rate and n equals the total number of years you wish to receive your payment). Multiply that number by the per year payout you seek. The resulting number will tell you how much you will need to invest to ensure yearly payment.
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Adjust your per-year amount if the current value you will need to invest is out of your price range. Switch your online calculator to the proper setting (for instance, on Money Chimp, click the tab on the right side of the screen that says "annuity.") Enter the value you wish to invest, the interest rate offered and the amount of years you want to receive payout. Again, make sure you select the option to pay out at the end of the year. Press "calculate." The resulting number tells you how much you will receive each year.
To calculate yearly payments manually, multiply your maximum amount by (i)/((1-(1+i)^-n).
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Ask your financial institution about any alternate annuity plans they provide. Some annuity plans will ensure that you receive money until you die, while others pay out over a set number of years.
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Tips & Warnings
Do not invest in a particular plan without first getting reliable advice from an accountant or financial professional.
