This immediate annuity calculator estimates the regular annuity payment you will receive by considering the term, payment frequency, invested amount & annual return rate. There is in depth information on how to determine this figure below the tool.
How does the immediate annuity calculator work?
This financial tool can help when trying to determine the immediate annuity payment, total number of regular payments, total value of the income received and the investment return during the given time frame.
The variables that should be provided in order to perform this calculation are:
- Desired amount to invest (IA) – this is the amount of savings you pay for your immediate annuity.
- Term (t) to receive annuity payments which refer to the number of years you expect to receive regular income.
- Annual interest / return rate (r).
- Payment frequency (P) which represents the frequency you will receive regular income from the company administrating your account. This can be Monthly (n=12), B-monthly (n=6), Quarterly (n=4), Semi-annually (n=2) or Annually (n=1).
The algorithm behind this immediate annuity calculator applies the following formulas:
- Formula for periodic payment of an immediate annuity (P):
P = IA * (r / n) / (1 - 〖(1 + r / n)〗^(-nt) )
- Total number of payments received (TP) = t * n
- Total value of the received payments (TV) = P * n
- Investment return = TV – IA
What is immediate annuity?
In financial industry, an immediate annuity is a type of product that is often used by people retiring which implies that the owner of the policy has to pay a single lump sum to the insurer to be administrated, while the insurer has to pay to the client regular annuity payments until the death of the client or within a specific time frame. The particularity of the immediate annuity payment is that its payments are made right after the contract signing.
Advantages of immediate annuities
- The payments are maderight away, so that the retiree does not have any worry about keeping his life standard starting first day of retirement.
- The income is guaranteed within the term negotiated and within the limits of the contract.
- It doesn’t allow the holder to waste money once invested in the contract, in comparison to a savings account where money can be withdrawn and spent any time.
Disadvantages of immediate annuities
- In case of a fixed annuity, the income may prove unsatisfactory over time in case the inflation increases, thus their purchasing power may decrease over time;
- In case of variable annuities usually there are high fees, while the payments may vary depending on the financial market conditions.
Example of a calculation
Let’s assume an individual retires at the age of 65 when he decides to sign for an immediate annuity contract with the following characteristics:
- The amount the person invests is $150,000 from his own savings account.
- The expected rate of return is 4.5%.
- He will receive monthly payments over the next 15 years. This will result in:
■ Monthly Immediate Annuity Payment = $1,147.49
■ Total number of payments received = 180
■ Total value of the Monthly received payments = $206,548.19
■ Investment return = $56,548.1904 Mar, 2015