How Do You Calculate The Return Rate On A Fixed Rate Annuity?
Fixed annuities are insurance investments that allow an investor to place money into a tax-deferred account and earn a fixed rate of return over time. The insurance company guarantees the assets over the duration of the annuity contract that can be used for lifetime income. This means that an investor has an income stream they are unable to outlive. Establishing the rate of return uses the present value and the future value of the annuity cash value. Write the formula for the “Rate of Return” on a piece of paper: i = ( FV / PV) ^(1/n) – 1. Fill in the variables you know. “FV” represents future value. “PV” represents present value and “n” represents the number of periods defined in the annuity, usually months or years. Assume the PV is $10,000 and the FV is $180,000 over 10 periods (years). Calculate the interest rate: [(180,000 / 10,000) ^1/30 -1]*100 = [18^.0333 – 1]100 = 10.1 = i. The rate of return is 10.1% compounded annually.
