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.
