Annuity Calculator Examples To Calculate Annuity

Annuity Calculator

About Annuity Calculator

There are two types of annuity: one is received at the beginning of the period, and another is to be received at the end. The only difference between the two is that the first installment will also be used to calculate interest for an annuity to be received at the end of the period. In another one, since it’s at the start of the period, there would be one period less for calculating interest. The reason could be that interest not received for 1st payment could be invested in the market and earn interest. This equation is helpful for the person to calculate what annuity amount will be received at regular intervals and, accordingly, one can invest. This calculator can also calculate the amortization of loans, structured settlements, income annuities, or lottery payouts.

Annuity Calculator

r * PVADue / [ {1 – (1+r)-n} * (1+r) ]

PVADue is the Present Value of an annuity due
r is the rate of interest per annum
n is the number of period or frequency wherein annuity will be received

The formula for calculating Annuity is as below:

Annuity DueAnnuity DueAnnuity Due can be defined as those payments which are required to be made at the start of each annuity period instead of the end of the period. The payments are generally fixed and there are two values for an annuity, one would be future value, and another would be present value.read more

Mathematically it can be calculated:

Ordinary Annuity

Wherein,

PVA Due is the Present Value of an annuity duePVA Ordinary is the Present Value of an ordinary annuityr is the rate of interest per annumn is the number of periods or frequency wherein annuity will be received

How to Calculate using the Annuity Calculator?

One needs to follow the below steps to calculate the annuity amounts.First, determine the amount to be invested in an annuity and whether it is an ordinary annuity or annuity due.The second step would be to calculate the interest rate, which is applicable and should be determined rate per period by dividing the rate by the number of periodic payments in the year.Now, determine the number of periods by multiplying the period for which annuity is taken with the number of periodic payments in a year, which is ‘n’ of the equation.Finally, determine the annuity value based on its type, as discussed above.The resultant figure would be annuity per period.

Example #1

Mr. Punk was trying his luck and had spent too much on buying the lottery tickets. He buys the lottery ticket for the last time for $1,000, where the winning price is $1,000,000, and the number of participants is less. This time his luck shines, and he won the lottery with a 20% tax deduction of 20%. He decides to invest in an annuity that shall pay him in yearly installments at the end of each year for the next 25 years. The ongoing market rate of interest is 5.67%.

Based on the given information, you must calculate the installment amount Mr. Punk would receive at the end of each year.

Solution

This question pertains to an ordinary annuity that pays a fixed amount at the end of the year. The amount that would be invested is $1,000,000, less than 20% tax, which is $800,000. We can now use the below formula to calculate the annuity amount. n would be 25 years since it’s paid annually, and the interest rate is 5.67% per annum.

Enter =5.67% x 800,000 / [1 – (1 + 5.67%)-25 ]

You will get a value as 60,632.62

Therefore, Mr. Punk would be eligible to be received a fixed amount of $60,632.62 for the next 25 years.

Example #2

He is continuing the same example above, assuming that Mr. Punk desires to receive the fixed amounts at the start of the year since he would be in the immediate requirement, and the company agrees. Now the annuity that will be received shall be paid at the beginning of the year, and you are required to calculate the new fixed annuity amount to be received by Mr. Punk in this case.

This question now pertains to annuity due, which pays a fixed amount at the beginning of the year. The amount that would be invested is $1,000,000, less than 20% tax, which is $800,000. Then we can now use the below formula to calculate the annuity amount. n would be 25 years since it’s paid annually, and the interest rate is 5.67% per annum.

Enter =5.67% x 800,000 / [1 – (1 + 5.67%)-25 * (1 + 5.67%)]

You will get a value as 57,379.22

Therefore, Mr. Punk would be eligible to receive a fixed amount of $57,379.22 for the next 25 years.

Hence it can be concluded that in the case of the annuity, the amount would be less than the amount to be received in the case of an ordinary annuity.

Conclusion

Annuities can be retirement plans for salaried people as here they can receive a fixed amount per their requirement, which can be either annual, monthly, or quarterly payments as desired. Big financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more such as banks, insurance companies, etc., create most annuities to generate regular fixed incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more for their clients.Further, there are even other types of annuities other than fixed annuity, such as a variable annuity A Variable AnnuityA variable annuity is a contract between a person and the insurance company and also serves as a tax-saving investment with the insurer, which has multiple benefits with regards to the periodic payments at the time of retirement and also the death benefit to the beneficiary in case the person dies before the expiry of the contract.read more, perpetuity annuities, life annuities, etc. Further, by deferring payments, one could also receive tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more on the same depending upon the tax jurisdiction the person belongs to. However, one also needs to be aware of the charges applied in annuities.