Definition:

An annuity is a series of equal cash flows that occur at regular intervals over a specified period of time. It’s often used in financial planning, retirement planning, and investment strategies.

Types of annuities:

  • Ordinary annuity: Payments are made at the end of each period.
  • Annuity due: Payments are made at the beginning of each period.  
  • Perpetuity: An annuity that continues indefinitely.

Key factors affecting annuity calculations:

  • Payment amount: The amount of each payment.
  • Interest rate: The interest rate earned or paid on the annuity.
  • Number of periods: The total number of payments.

Why are annuities important?

  • Retirement planning: Annuities are often used as a retirement income source, providing a steady stream of payments.
  • Investment vehicle: Annuities can be a valuable investment vehicle, offering guaranteed returns or growth potential.
  • Risk management: Annuities can be used to manage risk, such as the risk of outliving one’s savings.

In essence, an annuity is a series of equal cash flows that occur at regular intervals, and it’s a valuable tool for financial planning, retirement planning, and investment strategies.