What is an Annuity?
An annuity is a financial product that pays out a fixed stream of payments to an individual. These financial products are primarily used as an income stream for retirees. Annuities are contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals. They help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
There are various types of annuities: ordinary annuities where payments are made at the end of the period, annuities due where payments are made at the beginning of the period, guaranteed annuities that provide payments over a fixed period, fixed annuities that guarantee a fixed return, variable annuities that involve direct investment into funds, and equity-indexed annuities where payouts are linked to an index, among others.
How to Use an Annuity Calculator?
An Annuity Calculator is a tool used to calculate the future value of an annuity, which is the money that you will receive in the future from your investment made today.
To use an annuity calculator, you need to input details such as:
Type of annuity: Choose between an annuity due (beginning of period) or an ordinary annuity (end of period).
Compounding frequency: How often interest is reinvested into the balance of your investment.
Initial deposit: The present value or initial balance of the annuity.
Annuity amount: This is the regular deposit or withdrawal amount.
Length of Annuity: This refers to the duration for which the annuity pays.
Rate of Return: The interest rate by which the annuity grows annually.
Annual growth rate: This allows you to set a specific rate of change in your annuity payout.
After all these parameters are set, the calculator will give you the future value of your annuity.
An Actual Example to Demonstrate the Calculator
Let's say, you decide to put aside $100 at the end of each month with an interest rate of 5% annually, compounded monthly. You want to know the future value of your annuity after 10 years.
You fill in the parameters in the calculator:
Type of annuity: ordinary annuity
Compounding frequency: Monthly
Initial deposit: $0
Annuity amount: $100
Length of annuity: 10 Years
Rate of Return: 5% annually
Annual growth rate: 0% (since the annuity deposit is constant)
Based on the parameters, the calculator estimates that the future value of this annuity after ten years is approximately $15,528.23.