We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

How do I Calculate Annuity Interest?

By Deanira Bong
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

When you invest in an annuity, you put a fixed amount of money into an investment vehicle at the beginning or end of several fixed time periods. At the end of the investment duration, you get the maturity value of the annuity, which is the amount you invested plus interest. To find the amount of annuity interest, you first need to calculate the maturity value of the annuity, then subtract it by the amount of money you invested. To do these calculations, you need to know the amount of money per payment, the number of payments, the length of each payment period and the interest rate.

You easily can understand the concept behind calculating annuity interest if you know basic compound interest. When you invest money in an account that accumulates compound interest, you get interest on the principal and the previously accumulated interest. In other words, the amount of interest you get at the end of each period increases the longer your money sits in the investment vehicle.

For example, if you have $100 US Dollars that is earning 5 percent interest annually, at the end of the first year, you will have $105 USD. At the end of the second year, you will get 5 percent interest on $105 USD, which means that you will have $110.25 USD. Your money will grow by only $5 USD in the first year, but it will grow by $5.25 USD in the second year. The amount of interest you get increases with time, and you can calculate the value of your investment at the end of any period using the following formula: initial investment x (1 + interest rate per period)number of periods. In our example, the calculation for the second year is: 100 x (1 + 0.05)2 = 110.25.

With annuities, you need to carry out more sophisticated calculations because you add money each period. You could use the compound interest formula to calculate each payment separately, but such long calculations could become unmanageable. For easier calculations, use this formula: maturity value of annuity = payment per period x [((1+interest rate per period)number of periods - 1) / interest rate per period]. After finding the maturity value, you have to use only this simple formula to find the annuity interest: maturity value - (number of periods x payment per period).

Let's say that you invest $100 USD at the end of each year into an annuity that has a life of eight years at an interest rate of 5 percent per year. You can calculate the maturity value by plugging the numbers into the formula: 100 x [((1 + 0.05)8 - 1) / 0.05] = 954.91. At the end of eight years, after contributing $100 USD at the end of each year, you will have $954.91 USD. In other words, in this case, your annuity interest over the eight years will be 954.91 - (8 x 100) = 154.91, or $154.91 USD.

In these examples, we assume that you make payments at the end of each period, which is the basic annuity calculation. However, some annuities have payments at the beginning of each period. In such a case, the formula to calculate the maturity value of annuity becomes: payment per period x [((1 + interest rate per period)number of periods + 1 - 1) / interest rate per period]. Also, we assume that the annuity is an investment, but some annuities take the form of a promise to give you payments over a certain period of time instead — lotteries or pensions, for example. When calculating real annuities, you also often have to make an assumption regarding the interest rate, because interest rate fluctuates.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Discussion Comments

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.