I’ve been discussing annuities quite a bit in recent days so i thought it would be interesting to give a shot at calculating the value of an annuity in excel. This is obviously not a perfect method and I’ll try to give you an idea of things that could be done to improve on the calcs but it does give you a good idea.
This is a very simple annuity where someone pays an amount to start receiving an annual amount at a given age until he or she dies. So basically I want to determine the cost. I need to know what the annuity would be paying at that point every year, if the amount will be adjusted for inflation, etc.
I first looked for data on life expectancy which ended up being available per country (it does of course depend on being a man or woman). Here is a sample:
Then I entered a place for assumptions:
And finally a place where I did all of my calcs:
I used two excel functions that I’ve used here before, vlookup and PV. You can see the whole details in my spreadsheet. Here is a snapshot of my answer for my initial assumptions:
I also did a tab where I prove my calcs. To be fair, there are several things that could be improved:
-life expectancy will be higher by the time a current 32 year-old dies so that number should be boosted
-other factors would help to determine if the person will live a long life (general health, etc)
-inflation and market returns could certainly be changed
-etc
You can take a look at the spreadsheet here
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