YOU ASK:

How to determine how much money an annuity would generate yearly?

WE ANSWER:

If you select a fixed annuity, then it would be fairly simple to determine how much money your annuity would generate yearly by simply applying the guaranteed interest rate for the period. You must remember, though, that interest is compounded. Over time, the original fund grows as you apply interest not just on the original fund but also on the interest earnings it has earned for the previous periods.

Thanks to mathematics, you can now determine how much money an annuity would generate at a given year, provided that the interest rate remains constant throughout that time. All you need to know is:

  • How much money is invested annually.
  • How much interest will be applied annually.
  • The number of compounding periods (how many times the fund was applied compounded interest within a given period). In most cases, the interest is compounded annually.

Thus, you use the formula:

Principal x (1 + Interest)years = Total

For instance, if you invested $1,000 at a guaranteed interest of 5% for 5 years, then you have:

 = $1,000 x (1 + 0.05)5

 = $5,801

To get the yield for next year, you just apply the interest rate.

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