# The Annuity Formula – How to Make Sense of the Formula Used for Comput…

The annuity formula is one of the things that you need to understand and be familiar with if you are setting up your retirement fund by buying an annuity. With a basic knowledge of how the annuity formula works, you will be able to figure out how much you need to pay towards your retirement investment as you build it up. You will also be able to compute how much you will be able to get once you become able to withdraw your payments upon retirement.

How It Works

So how does this formula for computing annuities work? The formula basically works on the application of time values on money. When you work with the annuity formula, what you are doing is calculating the future value of your money based on the interest rate currently in place when you made your retirement investment.

In working with the formula, you are simply calculating the value of your money after a given number of years with the given interest rate factored in. You only need to be familiar with how simple and compound interests work in order to calculate your annuity.

Why is it important that you are familiar with the annuity formula when you make your plans for investing your money so you can enjoy it upon retirement? The most obvious advantage that a familiarity with the formula will give you is you will be able to figure out how much money you will have obtainable to you when you retire. It will also give you an idea of how much of this money you will receive every pay period.

Knowledge of the formula will also allow you to compute how much money you need to set aside for your investment every month or every year as you build your nest egg for your retirement. Most importantly, a familiarity of the formula will help you decide whether an annuity plan being offered to you is really the one that you must buy.

Given that your annuity will be one of the income flows that you will rely upon when you reach retirement, it is important that you make the right choice when buying it. By being familiar with the annuity formula, you can become more confident that you are indeed making the right choice when you choose to buy any given annuity plan.

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