Close Menu
  • Home
  • Economic News
  • Stock Market
  • Real Estate
  • Crypto
  • Investment
  • Personal Finance
  • Retirement
  • Banking

Subscribe to Updates

Get the latest creative news from FooBar about art, design and business.

What's Hot

What’s next for the ‘big, beautiful bill’?

July 1, 2025

The Bond Canary In The “Big Beautiful” Coal Mine

July 1, 2025

Here’s How Long to Keep Paperwork After Selling a House

July 1, 2025
Facebook X (Twitter) Instagram
  • Contact Us
  • Privacy Policy
  • Terms Of Service
Tuesday, July 1
Doorpickers
Facebook X (Twitter) Instagram
  • Home
  • Economic News
  • Stock Market
  • Real Estate
  • Crypto
  • Investment
  • Personal Finance
  • Retirement
  • Banking
Doorpickers
Home»Retirement»What is the difference between ordinary annuity and annuity due?
Retirement

What is the difference between ordinary annuity and annuity due?

July 8, 2024No Comments3 Mins Read
Facebook Twitter Pinterest LinkedIn Tumblr Email
Share
Facebook Twitter LinkedIn Pinterest Email

An annuity is a financial product that offers a consistent income stream over a specified period, commonly used in retirement planning to convert a lump sum investment into regular payments.

There are various ways to structure annuity payments, such as ordinary annuities and annuities due. The timing of these payments can significantly impact the annuity’s overall value.

Understanding Ordinary Annuities

An ordinary annuity involves receiving equal payments at the end of each period, whether monthly, quarterly, or annually, depending on the terms of the annuity contract.

How Does an Ordinary Annuity Operate?

When you invest a lump sum in an annuity, the insurance company managing your contract generates periodic payments for you. These fixed payments are calculated based on factors like the initial investment, interest rate, and total number of payments.

Key factors include:

  • Present value (PV): Initial investment amount.
  • Payment (PMT): Fixed amount received at the end of each period.
  • Interest rate (r): Annual rate of return offered by the annuity.
  • Number of periods (n): Total payments received.

The formula to calculate payment amount for an ordinary annuity is:

PMT = (r/12 * PV) / (1 - (1 + r/12)^(-n)

Illustrative Example

Suppose you invest $100,000 in an annuity with a 5% interest rate for 10 years, receiving monthly payments:

PMT = (0.05/12 * $100,000) / (1 - (1 + 0.05/12)^(-120)

PMT = $1,060.66

Therefore, you would receive approximately $1,060.66 monthly for 10 years in an ordinary annuity.

You can use Google Sheets or Excel to calculate annuity payments using the PMT function under financial.

Understanding Annuities Due

An annuity due involves receiving the initial payment and subsequent payments at the beginning of each period, impacting the annuity’s value due to the time value of money.

How Does an Annuity Due Function?

Similar to an ordinary annuity, you invest a lump sum with an insurance company, but receive payments at the beginning of each period.

The payment calculation for an annuity due considers the time value of money.

Illustrative Example

Using the same example as the ordinary annuity, the monthly payment for an annuity due with a $100,000 investment, 5% interest rate, and 10-year term is:

PMT = 100000 * (0.05/12 / (1 - (1 + 0.05/12)^(-120)) * (1 / (1 + 0.05/12)))

PMT = $1056.25 (rounded)

Due to receiving the first payment earlier, the annuity due payment is slightly lower ($1,056.25) compared to an ordinary annuity ($1,060.66).

Key Differences Between Ordinary Annuities and Annuities Due

The primary distinction between the two is the timing of payments. Annuities due pay at the beginning of each period, potentially resulting in a higher future value due to the time value of money.

Receiving payments earlier with an annuity due may offer a slight advantage.

Online calculators or spreadsheet applications like Excel can help determine the present and future value of annuities by inputting the interest rate, payment amount, and duration.

Conclusion

Understanding ordinary annuities and annuities due is crucial for making informed financial decisions. The timing of payments can significantly impact the annuity’s value and income stream. Online tools simplify the calculation process for both types of annuities, ensuring accurate financial planning.

following sentence: “I will not be able to attend the meeting tomorrow due to a prior commitment.”

Due to a prior commitment, I regret to inform you that I will not be able to attend the meeting tomorrow.

annuity difference due ordinary
Share. Facebook Twitter Pinterest LinkedIn Tumblr Email

Related Posts

Layer-1 vs. Layer-2: What Is the Difference?

June 28, 2025

Pros and cons of government 457(b) retirement plans

June 26, 2025

Traditional IRA vs. self-directed IRA: How they compare

June 26, 2025
Add A Comment
Leave A Reply Cancel Reply

Top Posts

Era of Bund scarcity is over, says German debt chief

June 17, 20250 Views

Momentum Investing Gives You An Edge… Until It Doesn’t

September 17, 20240 Views

The New Strongmen | ZeroHedge

October 28, 20240 Views
Stay In Touch
  • Facebook
  • YouTube
  • TikTok
  • WhatsApp
  • Twitter
  • Instagram
Latest
Economic News

What’s next for the ‘big, beautiful bill’?

July 1, 20250
Economic News

The Bond Canary In The “Big Beautiful” Coal Mine

July 1, 20250
Real Estate

Here’s How Long to Keep Paperwork After Selling a House

July 1, 20250
Facebook X (Twitter) Instagram Pinterest
  • Contact Us
  • Privacy Policy
  • Terms Of Service
© 2025 doorpickers.com - All rights reserved

Type above and press Enter to search. Press Esc to cancel.