Calculate the Future Value of an Ordinary Annuity

By Stock Research Pro • March 14th, 2009

An ordinary or “fixed” annuity provides a stream of fixed payments to the investor at the end of each period for a specified amount of time. Bond coupon payments are often considered ordinary annuities. The owner of the annuity receives these payments in exchange for a fixed sum of money provided up-front. In contrast to ordinary annuities, the returns of variable annuities can fluctuate, depending on the direction of the market. Annuities are often used as part of a retirement planning strategy.

Why Invest in Annuities

Taxes create an important issue for consideration when planning for retirement. An advantage offered by annuities is that their earnings can grow on a tax-deferred basis until the investor starts receiving a payout from the annuity. This enables the money to grow faster. For most annuity investors, it also means that they will be taxed at a lower rate since they are usually in a lower tax bracket when they retire.

Types of Annuities

Fixed or Ordinary Annuity: The company guarantees your principal and a fixed rate of interest. As long as the company is remains financially stable, the money you have in a fixed annuity will continue to grow. Fixed annuities are designed for conservative investors who seek assurance as to the safety of their principal.

Variable Annuity: The money in a variable annuity is invested in a fund which has a stated objective. The money paid out to the investor is dependent on the performance of the fund. While variable annuities can yield greater returns, they can put more of your investment at risk.

Immediate Annuity: An annuity contract that is purchases with a lump sum of money and begins to receive income within a short period of time. An immediate annuity can be either fixed or variable.

Flexible Premium Annuity: Variable annuities usually allow additional money to be invested after the initial premium.


Getting Start in Annuity Investing

If you already have a financial advisor or a financial institution (such as an insurance company, a bank or a brokerage house) you work with, you may want to contact them to discuss your objectives and your options.


Consumer Reports often provides annuity reviews

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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