# How Much Does a \$100,000 Annuity Pay Per Month?

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When building a retirement portfolio, you have many options to choose from. Stocks, bonds, mutual funds and exchange-traded funds (ETFs) can all be part of a basket of investments that will help you make sure you’re able to take care of yourself once you are done working. Annuities are a bit more complex than some other investments, but they provide guaranteed retirement income that can come in very handy in your retirement plan. It isn’t always easy to know exactly what an annuity will pay, though, so here let’s take a look at what a \$100,000 fixed annuity will pay each month in your retirement.

Evaluating an annuity as a potential part of your retirement plan? Consider a financial advisor’s help. Finding one is easy with SmartAsset’s free financial advisor matching service.

## What Is an Annuity?

An annuity is a financial contract between you and an insurance company that requires the insurance company to make periodic payments to you over a period of time. It is sometimes a source of retirement income when you want or need a guaranteed source of income without worrying about market fluctuations.

It’s possible to calculate the value of an annuity on your own using one of several methods. The variables that you need to know are the interest rate payable on the annuity and the length of time for which you will receive the periodic payments. You can also use a financial calculator to calculate the payment on an annuity in addition to the two methods shown. The insurance company from which you buy the annuity will have tables you can look at for a variety of combinations of interest rates and time periods.

## Calculating Payments on an Annuity: Two Methods

### Method 1

An annuity is an equal stream of payments over a given time. You can use the present value of an annuity formula, solving for payment, or an Excel spreadsheet. The formula for calculating the payment on an annuity is the following:

Payment = Principal x i (1+i)n / i (1 +i)n – 1

where i = monthly interest rate and n = number of payment periods. In this formula, the lower-case n is an exponent.

Imagine that you have paid \$100,000 for an annuity that will make payments to you monthly for ten years. The interest rate you were promised in the annuity contract was 3%. You want to know how much you are paid each month:

Payment = \$100,000 x 0.03/12 (1 + 0.03/12) 10 x 12 / (1 + 0.03/12)10 x 12 – 1 = \$965.61

### Method 2

Use the same example as above and change the interest rate to 5%, keeping the number of years at 10.

Using an Excel spreadsheet, you solve for payment. Here is the formula you use:

=PMT(i, n, PV)

In this equation, the following values are used:

i= interest rate/number of payment periods

n = number of years multiplied by number of payment periods

PV = present value of the annuity

In this case, enter the following in one cell:

=PMT (0.05%/12, 10 x 12, 100,000, 0) = \$1,055.24

where i is the 5% interest rate divided by 12 monthly payments, n is the number of payment periods or 10 years times 12 monthly payment periods in each year and 100000 is the present value of the annuity.

The monthly payment on a \$100,000 annuity if the interest rate is 5% and the time period is ten years is \$1,055.24.

The present value of an annuity is based on the principles of time value of money. It is defined as the present value of the future cash flows generated by the annuity at a given interest rate and for a given time.

The monthly payments on an annuity increase if the interest rate increases or the term of the annuity decreases. The monthly payments would decrease if the interest rate decreased, or the term of the annuity increases.