A deferred annuity is an investment product sold by insurance companies as a supplemental retirement vehicle. Investors pay a premium into the contract that grows at either a fixed or variable rate. Taxes are not due on an annuity until distributions are made, generally after age 59-1/2 to avoid an early distribution penalty. Calculating the future value of an annuity is a compound interest calculation.
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Use the following equation to calculate the future value of a deferred annuity:
FV = PMT [(( 1+i)^n -1) / i]
where "FV" is the future value, "PMT" is the value of each premium payment, "i" is the interest and "n" is the number of years.
Establish the parameters and define the variables based on the annuity guarantees, terms or general interest rate/inflation rate growth. Assume you are investing £3,250 annually with a guaranteed 3 per cent annual rate of return for 10 years.
Plug in the variables to the formula: FV = 5,000 [((1+0.03)^10 -1) / 0.03].
Solve for Future Value: FV = 5000 [((1.03)^10 - 1) / 0.03] = 5,000 [(1.34391 -1) / 0.03 = 5,000 [.34391 / 0.03] = 57318. The anticipated future value of your deferred annuity in 10 years under these parameter is £37,256.
Consider taxes upon distribution. Speak with a tax adviser about distributions and how they may increase your other retirement income sources by putting you in a higher tax bracket.
Tips and warnings
- Annuities are not FDIC insured. Check to see if your annuity has long-term guarantees or if rates adjust annually. Variable annuities will fluctuate based on the movements of the mutual fund investments.
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