# How to Calculate Deferred Annuity

Written by kay miranda
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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.

Skill level:
Easy

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## Instructions

1. 1

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.

2. 2

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.

3. 3

Plug in the variables to the formula: FV = 5,000 [((1+0.03)^10 -1) / 0.03].

4. 4

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.

5. 5

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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