Annuity Calculator
Annuity Formulas
Future Value (Ordinary):
FV = PMT x [(1+r)^n - 1] / r
Present Value (Ordinary):
PV = PMT x [1 - (1+r)^-n] / r
Annuity Due Factor:
Multiply by (1 + r)
Understanding Annuities
What is an Annuity?
An annuity is a series of equal payments made at regular intervals over a specified period. Annuities are commonly used in retirement planning, loans, and insurance products. Understanding how annuities work helps you make better financial decisions.
Ordinary Annuity
Payments occur at the end of each period. Most loans and bonds use ordinary annuities. Examples include monthly mortgage payments and bond coupon payments.
Annuity Due
Payments occur at the beginning of each period. Rent and insurance premiums are typically annuities due. These have slightly higher values due to earlier payments.
Types of Annuities
| Type | Description | Best For |
|---|---|---|
| Fixed Annuity | Guaranteed fixed payments | Conservative investors |
| Variable Annuity | Payments vary with investments | Growth-oriented investors |
| Immediate Annuity | Payments begin right away | Current retirees |
| Deferred Annuity | Payments begin in future | Pre-retirees saving |
Key Concepts
Present Value
The current worth of a series of future payments, discounted at a specific interest rate. Use this to determine how much to invest today for desired future income.
Future Value
The total accumulated value of all payments plus interest at a future date. Use this to see how much your regular savings will grow.
Important Considerations
Annuity products from insurance companies often have fees, surrender charges, and tax implications not reflected in basic calculations. Consult a financial advisor before purchasing annuity products.
Frequently Asked Questions
What is the difference between an ordinary annuity and an annuity due?
An ordinary annuity makes payments at the end of each period (like most loans and bonds), while an annuity due makes payments at the beginning of each period (like rent or insurance premiums). Annuity due payments have slightly higher present and future values because payments are made earlier, giving them more time to earn interest.
How do I calculate the present value of an annuity?
The present value of an annuity is calculated using the formula: PV = PMT x [1 - (1+r)^-n] / r, where PMT is the payment amount, r is the interest rate per period, and n is the number of periods. This tells you how much a series of future payments is worth today, which is useful for comparing lump sums to payment streams.
What is a good annuity rate for retirement?
Annuity rates vary based on current interest rates, your age, and the type of annuity. As of recent years, immediate fixed annuities for a 65-year-old might offer payout rates of 5-7% of principal annually. Variable annuities can have higher potential returns but also higher risk. Always compare multiple insurance companies and understand all fees before purchasing.
Should I buy an annuity for retirement?
Annuities can provide guaranteed lifetime income, which helps protect against outliving your savings. They're best for those who want predictable income and have already maximized other retirement accounts. However, they often have high fees and surrender charges, and you give up access to your principal. Consider your overall financial picture and consult a fiduciary financial advisor.