An annuity is simply a legal contract between you as an individual or an insurance company where you make an initial lump-sum payment, or series of payments, on a regular schedule, and in return, you receive periodic payments, either fixed at a certain date in the future or at some agreed upon date in the past, beginning with an initial purchase date. Annuity payments are generally tax-exempt and they usually last a lifetime. Although annuities offer a guaranteed regular income during your retirement, the amounts received may not be enough to cover your expenses and live comfortably once you quit working. That is where an annuity calculator can come in handy.
Using these tools, you will be able to determine how much income would be regular if you were to withdraw every month until retirement, at age 65, and then compare it to what you would make with today’s interest rates. By knowing the difference between the amount of money left in an annuity and the amount received in regular monthly payments, you can calculate how much, if any, you will need to supplement your current income with. If you have a lump sum to withdraw at retirement, the calculator can help you decide if you should do so. It can also help you determine if you should borrow from your annuity to fund your retirement. The calculator can also help you decide whether it would be better for you to sell all or part of your annuity. When you make adjustments to your planned retirement investment using the calculator, the results will be useful for your decision making.
There are three basic types of annuities: ordinary, reverse annuities, and special annuities. Ordinary annuities are contracts entered into by the buyer or issuer with a payment amount equal to the face value of the annuity, with a term of years. Reverse annuities follow a different process. Instead of receiving a lump sum, holders are entitled to receive payments equal to a percentage of the face value of the annuity.
The calculation of the present value of an annuity starts by estimating the rate of return, or the amount of interest that will be earned on the principal paid out over time. This can be done by using current interest rates. By plugging this into the formula, you can determine how much, if any, additional money you will need to supplement your annuity, if you take advantage of the additional payments. You can also determine how much, if any, additional money you will receive in each installment, if you take advantage of compound interest.
Another useful tool for calculating the present value of an annuity payment is to use life expectancy tables. These tables can be found online and can be used to help with all aspects of your annuity. You can use them to track your life expectancy, how long you are expected to live and what kind of lifestyle you are living as well.
Annuity payments are typically guaranteed. Your annuity can be invested in almost anything and can earn you a higher rate of interest. However, the annuitant should not simply take their payment and allow the insurance company to handle the invested money for them. Instead, the annuitant must ensure that their annuity payment is invested according to the best interest rate available. If they fail to do so, the entire value of the annuity can be depleted before the annuitant receives a single payment from the insurance company.