Scribd
Upload
41 views

Calculating An Annuity: 1) Solving The Total Amount

1) Using the compound interest formula, $1,000 invested annually at 5% interest for 3 years totals $3,128.56. 2) The annuity formula makes these calculations easier. For example, to find the monthly payment needed for a $100,000 annuity over 30 years at 5% interest, the monthly payment is $755.11. 3) To calculate how long it would take for a $1,000 annual investment at 4.5% interest to reach $100,000 for retirement, the number of years is 34.43.

Uploaded by

Marko Čičak
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
41 views

Calculating An Annuity: 1) Solving The Total Amount

1) Using the compound interest formula, $1,000 invested annually at 5% interest for 3 years totals $3,128.56. 2) The annuity formula makes these calculations easier. For example, to find the monthly payment needed for a $100,000 annuity over 30 years at 5% interest, the monthly payment is $755.11. 3) To calculate how long it would take for a $1,000 annual investment at 4.5% interest to reach $100,000 for retirement, the number of years is 34.43.

Uploaded by

Marko Čičak
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Calculating an Annuity

Before we use the annuity formula, let's solve a short 3 year example the "long way".
First we need the compound interest formula which is:
Total !rincipal " # $ % &ate 'years
(ow let's say the amount that we invest annually is )*,+++ per year and the interest rate is ,-.
The )*,+++ invested 3 years ago has .ecome
)*,+++ 0 #$.+,'3 )*,+++ 0 $.*123$* )*,1$2.4*4
The )*,+++ invested * years ago has .ecome
)*,+++ 0 #$.+,'* )*,+++ 0 $.$554 )*,33*.,+
The )*,+++ invested $ year ago .ecomes
)*,+++ 0 #$.+,'$ )*,+++ 0 $.+, )*,$5+.++
6dding up all 3 yearly amounts, we o.tain )3,+$*.**
6s you can see, the mathematics of this can .e a little cum.ersome especially when the time
involved gets larger.
To ma7e these calculations a little easier, there is a formula:
1) Solving the Total Amount
where the 689:(T is the annual amount invested each year,
'n' is the num.er of years and
'r' is the annual rate of the investment.
;o, we have:
)*,+++ 0 < =#$ % .+,'#3 % $' >$? @ .+, A B )*,+++
)*,+++ 0 < =$.35+4,,25 >$? @ .+, A B )*,+++
)*,+++ 0 < .35+4,,25 @ .+, A B )*,+++
)*,+++ 0 < 4.1+5$$* A B )*,+++
)2,+$*.**4 >)*,+++
)3,+$*.**
Chich is the answer we o.tained using the "long" method at the top of this page.
2) Solving the Monthly Amount

Dou have an ,- annual interest annuity which yields )$++,+++, after *1 years.
Eow much has to .e invested each yearF
Ce input the amounts into the numerator:
#=#$.+,'#*1 % $'>$? @ .+,' >$
which eGuals 3,.2144$1$42
Hividing $++,+++ .y the numerator
$++,+++ @ 3,.2144$1$42
$*55.1135$12*3 which rounds to
)$,*55.11
3) Solving for Years

Dou plan for your retirement .y setting up an ,.1- annuity with an annual investment of )*,1++
and you would li7e this to yield )1++,+++ when you retire.
Eow many years will this ta7eF
Inputting these num.ers into the numerator of the formula:
Jog#.+,1 0 #1++,+++ K *1++' % $.+,1'
Jog#$3.+,1'
$.*3*5$42,3$
The log of the denominator $.+,1 +.+314*233,$,1
The num.er of years $.*3*5$42,3$ @ +.+314*233,$,1
34.4,33 years

You might also like